By David Cruz
Correspondent
The old saying goes that you get a billion here and a billion there and soon enough you’re talking about real money. That’s kind of what the point was at today’s lengthy Senate Legislative Oversight Committee hearing on the performance of New Jersey’s pension fund and its increasing reliance on hedge funds and other alternative investments. Plus, the outside money managers and the fees they charge.
“I want to stress that this is not a gotcha hearing and is not partisan,” began Chairman Sen. Bob Gordon. “New Jersey’s shift to alternative investments was made under both Democratic and Republican governors.”
Investment Council Chairman Tom Byrne and Division of Investments Director Chris McDonough could have felt as if they were stepping into the lion’s den. Why, the committee majority wanted to know, was the state paying over $600 million in fees to outside money managers?
“Specialization generally costs, so we’re not giving people management fees because we love them,” said Byrne. “We’re giving them management fees because we think the diversification is important.”
Byrne says it’s that diversity — a mix of hedge funds, stocks, real estate and other alternatives — that has kept the fund meeting or exceeding its benchmarks.
“We could probably get cheaper fees but then you have the problem of adverse selection,” he added. “You’d have managers that you probably didn’t want.”
But the committee had its own witnesses to call. Consultant Jeff Hooke and Investment Council Vice Chair Adam Liebtag, who works for the Communications Workers of America. Not surprisingly, their opinions were slightly different.
“Let’s say you set a 60 equity and 40 U.S. bond mix, instead of hedge funds, you’d have much greater returns by just ignoring the whole alternative class altogether,” said Hooke. “My calculation is $2.4 billion, so yeah, yeah the hedge funds and private equity funds have profits, that’s true, but you would have more profits if you’d just put the money in these indexes, with much lower fees.”
Liebtag compared the fund’s management from 2010 to 2011. “There was a 25 percent increase in the amount of money allocated to alternative investments but a 37 percent fee increase,” he noted.
This has all become quite an issue as the state and the public employee unions battle in court over the state’s contribution to the pension. “If we had it, I’d contribute it,” the governor has said repeatedly. But several members of the committee suggested that the $600 million in fees paid to outside money managers could go a long way toward helping make that contribution, but the investment board reps said it doesn’t work that way. You have to spend some money, they said, to make some money.
Despite the sharp disagreements on how the council is investing the state’s money, there was general agreement that a change in strategy right now would be ill-advised, and — for the Democrats and the unions anyway — the next best course of action would be a forensic audit, conducted by in-house staff of course, in order to save money.