(October 9, 2012) — Forget chief investment officers.
One New Jersey lawmaker is pushing to legislate allocation decisions for the state’s $70 billion public pension system.
The bill, introduced by Sen. Shirley Turner (D-Lawrenceville), would prohibit “the investment by the State of pension and annuity funds in hedge funds and derivative contracts.” Turner acknowledged to FINalternatives that the system is “woefully, severely underfunded because we haven’t made regular deposits for 15 years.” But, she said, it is “wrong” for the fund to attempt “to make up for those skipped payments by gambling on an aggressive, high-risk investment strategy.”
In the 2011 fiscal year, the hedge fund portfolio in New Jersey’s public fund returned 10.77%, and the investment team allocated an additional $440 million to direct hedge fund strategies.
No matter how well Tim Walsh, director of the state’s public pension system, and his investment team do, in hedge funds and other asset classes, he indicated in a recent interview with aiCIO that he’s acutely aware they can’t bring the system to full funding on their own. “There was a 10- to 12-year contribution holiday. You can get good returns, but without contributions for that long…” he said, trailing off.
In the proposed legislation (Senate bill no. 1140), Turner, who first took elected office in 1983, asserts that “the 2008 financial meltdown has brought to light the enormous risks that investors take when they dabble in under-regulated hedge funds and derivative contracts. Hedge funds suffered debilitating losses when credit markets dried up. Since the investment strategy of many hedge funds relies on the availability of cheap credit, the credit crunch tore asunder the foundation of many highly leveraged hedge funds.”
She concludes: “Considering the horrid events of the fall of 2008, it has become abundantly clear that the fiduciary responsibility of the State of New Jersey is incompatible with investing pension and annuity funds in exceedingly risky and poorly supervised hedge funds and derivatives.”
If the bill passes, it will go into effect immediately. Walsh and the State Investment Council would be legally obligated to liquidate their hedge fund and derivatives holdings within three years of the bill’s signing.
Neither Turner nor Walsh responded to requests for comment before publication time.