New Jersey urged to increase alternatives exposure

Orin Kramer, chairman of the New Jersey's investment council, urged council members to lift the 28% cap on alternatives. The pension could have made $21bn in the past decade by boosting its private equity, real estate and hedge fund exposure.

Eight months after Republican Governor-elect Chris Christie froze the $67.6 billion New Jersey pension system’s alternatives investment programme, a key pension official is urging its investment committee to let the pension expand its alternatives exposure.

Orin Kramer, chairman of New Jersey’s 13-member state investment council, proposed at a council meeting Thursday to increase the pension’s limit on alternative investments, capped at 28 percent of the total fund.

The proposal marks a stark contrast to a remarks made last year by council member James Marketti, who suggested the pension should no longer make alternative investments and instead invest in Build America Bonds – a new type of municipal bond that gives the issuer a 35 percent subsidy on interest cost

Andrew Pratt, communications director for the pension, said there was no vote on Kramer’s proposal but the idea “definitely will be discussed at future meetings”.

As of 28 May, alternatives made up $10.1 billion, or about 15 percent of New Jersey’s total $67.7 billion fund market value.

Pratt, who attended the meeting, said Kramer didn’t specify whether the pension should lift the upper 28 percent limit to alternatives or increase the 7 percent allocations to hedge funds, private equity, real estate and real assets, respectively, that comprise the 28 percent.

“What [the investment council] will do is debate this issue and come up with an answer,” Pratt said.

Orin Kramer

Kramer did, however, give the investment council an admonishment for not having allocated more to alternatives previously.

According to Pratt’s notes from the meeting, Kramer said if New Jersey had reduced its equity exposures at the end of 1999 and invested 12 percent of its assets in each of private equity, real estate and hedge funds, then, assuming the mean performance in each of those asset classes, the pension system would have had an additional $21 billion in assets at the end of 2009.

As of 31 March, New Jersey had made about $8.5 billion in commitments to private equity funds, $4 billion in commitments to real estate funds, $4.3 billion in commitments to hedge funds and $1.1 billion in commitments to real assets, such as commodity funds.

The pension does not yet have an allocation or any commitments to infrastructure funds. But the pension remains interested in the asset class and is considering an allocation between 3 to 5 percent, according to a person familiar with the pension’s intentions.  And the pension is “leaning toward 5”, the person added.

However, a freeze on alternative investments slowed down the pension’s ability to hire its first infrastructure consultants.

Last year, when Republican Governor Chris Christie came into office, he instituted a freeze on the hiring of any new alternative investment managers or consultants. New Jersey participated in a request for information for infrastructure managers put out by the Pension Consulting Alliance last year. The request yielded more than 60 responses. New Jersey winnowed the list down to 20 but was held up internally from sending out qualification letters and doing the next round of the selection process due to the freeze.

Pratt said he didn’t know whether the freeze had formally been removed. But pension documents show that, despite the freeze, the pension was at least able to invest $500 million in March into Goldman Sachs Hedge Fund of Funds and Rock Creek s Woodley Fund of Funds.

Other factors, such as changeover on the investment committee and pension staff, also slowed down efforts to move forward with alternative investments. 

But things may be getting back to normal now. After a leave of absence earlier this year, Kramer, himself a hedge fund manager, is back with the pension. And the pension recently named its new chief investment officer, Tim Walsh.

Walsh, formerly the chief investment officer for the Indiana State Teachers Retirement Fund, will begin with the pension in August.