Fresh off its successful effort to raise the cap on alternative investments to 38 percent, the
Separately, New Jersey announced $600 million in new private equity commitments to be spread equally among three funds. The first is $200 million to
The second commitment, also $200 million, is being made to
Pension officials say they are backing more alternative investments not only because they offer better returns, but also because they can lessen a portfolio’s overall risk level since alternatives are less influenced by changes in interest rates and the stock market. Tim Walsh, the state’s investment director, told the Bergen Record, “Hopefully we’ve learned our lesson,” in describing the damage wrought by the financial crisis. The aim of alternative investments, he said, is “to get diversified,” adding that such investments have outperformed stocks over the last decade.
New Jersey’s state pensions are only 57 percent funded, one of the lowest funding ratios in the nation among state pensions. As of December, the state had $53.9 billion in unfunded liabilities, according to a report by state’s Treasury Department.
By far, the alternative category to see the biggest target increase is hedge funds, whose allocation level is set to nearly double under the new 2012 targets, to 10 percent from 5.3 percent. That rise translates into about $3.5 billion in additional money for the hedge fund industry.
Moreover, under the state’s “Preliminary Long Term Target,” a provisional target that is pending the completion of an asset-liability study, alternative assets are set to grow even further, to 33.2 percent, closer to the state’s newly raised 38 percent cap (the state’s previous alternatives cap was 28 percent). Under that long-term target, the allocation to hedge funds would grow to 14 percent.
New Jersey defines alternative investments as hedge funds, private equity, real estate and commodities/real assets. Private equity, representing 6.7 percent of the current portfolio, will rise to 7 percent under the 2012 plan. Commodities, now 2 percent of the portfolio, are set to double to 4 percent.
Much of the money being targeted to alternative investments will come from a shift in emphasis away from U.S. fixed income investments. The previous target of 41.8 percent for U.S. fixed income will become a 30.5 target under the 2012 allocation plan.