New Jersey to Cut Its Hedge Funds in Half

New Jersey’s $76.5 billion public pension plan will slash its hedge fund allocation in half, a move unanimously approved by members of the State Investment Council Wednesday at its Trenton meeting.

As part of a revamp of its investment strategy, the pension program will drop the hedge fund share of the portfolio to 3% from 6%. The fund’s officials have been disappointed in that asset class for some time due to high fee payments and mediocre returns.

At a 38.4% funding level, New Jersey’s investment division also wants to cut some of its riskier assets. It is concerned about the trade war and a possible economic slowdown.

“I am happy to see us move in this direction,” said Eric Richard, one of the investment council’s union members, and also the legislative affairs director for the New Jersey American Federation of Labor and Congress of Industrial Organizations. He also questioned the oft-touted argument to justify hedge funds as offering downside protection.

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The new plan also calls for more US Treasury bonds (to 5% from 3%) and private equity (to 12% from 10.25%) investments. It also seeks to take some of its stocks and reinvest in developed markets outside the US.

Gradual implementation of this new strategy will begin in October, with most changes slated to happen by the second quarter of fiscal 2020.

The overhaul marks new thinking under Gov. Phil Murphy’s regime. The last revision was in 2016, under Gov. Chris Christie’s administration. The Christie strategy also pulled back hedge funds (to 6% from 12.5%), but not as much as plan officials would have liked. Christie’s appointees were bullish on hedge funds and other alternatives, citing them as diversifiers while also claiming they produced good returns despite high fees.

Murphy, a former Goldman Sachs executive, is a big critic of hedge funds. When he ran for governor, he pushed for New Jersey to “get out of the hedge fund business.”

New Jersey paid $95.5 million in fees and expenses to its hedge fund managers in fiscal 2018. The space has returned an aggregate 3.1% for credit hedges and 1.54% for equity-based strategies over the past five years. The HFRI Credit and Equity Hedge Total indices have returned 3.57% and 4.07%, respectively, for those two strategies over the same period.

The New Jersey State Investment Council is expecting to return 4.68% in the current fiscal year, which ends June 30. The pension’s assumed rate is 7.5%.

Gov. Murphy was unable to be reached for comment.

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Tags: Hedge Funds, New Jersey, New Jersey State Investment Council, Pension, Phil Murphy

A US District Judge has approved a $320 million derivative action settlement between Wells Fargo, the Fire & Police Pension Association of Colorado, and the City of Birmingham Retirement & Relief System.

The settlement includes a monetary consideration of $240 million, and Wells Fargo agrees and acknowledges that facts alleged in the derivative action were a significant factor in causing certain corporate governance changes undertaken by Wells Fargo, which include improvement to Wells Fargo’s internal controls, internal reporting, and expanded and enhanced oversight of risk management by Wells Fargo’s board of directors.

The settlement resolves claims that Wells Fargo officials breached their fiduciary duties by knowing about or disregarding the creation of millions of unauthorized, bogus customer accounts by bank employees, and failing to stop their creation.

The parties also agreed that corporate governance reforms and clawbacks have a value to Wells Fargo of $80 million, for a total settlement value of $320 million.

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The complaint alleged that Wells Fargo’s board of directors and executive management perpetuated a business model of aggressively cross-selling additional products to existing customers since 2011.

Wells Fargo was accused of setting unreasonably high sales quotas and threatening to fire employees who failed to meet the quotas. The complaint alleged that this effectively forced bankers to open more than 2 million unauthorized accounts to keep their sales numbers competitive, which resulted in serious and systematic violations of federal and state laws.

“The goal of Wells Fargo’s high pressure cross-selling strategy was to show steady quarterly growth in the opening of customer accounts, maintain the company’s industry leadership in cross-selling, and, most importantly, drive up the Bank’s share price,” said the complaint. “The artificially inflated stock price resulted in enormous compensation for the bank’s executives.”

The complaint also alleged that Wells Fargo’s board of directors knew about the significant weaknesses in the company’s internal controls that should have warned of the misconduct at the bank’s branch level. However, according to the complaint the board consciously and knowingly allowed the abuse to continue so that the bank’s cross-selling statistics—which was the primary reason for the sharp rise of Wells Fargo stock—remained strong.

The complaint also claimed that the board’s failure to take action resulted in fines of $185 million, a 9% drop in the bank’s stock, and “severe reputational damage and liability.”

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Tags: City of Birmingham Retirement & Relief System, Derivatives, Fire & Police Pension Association of Colorado, Lawsuits, Wells Fargo