Newark — On the heels of the revelation that New Jersey’s combined pension portfolios lost more than $6 billion last year as hedge fund returns plummeted, Democratic gubernatorial candidate Phil Murphy said the losses should prompt the state to get out of the hedge fund business and lead to a complete overhaul in the mindset used to invest state funds.
Murphy said the losses further prove the potential of a public bank, owned by the state, to bring in stable and reliable returns to be reinvested in the pension system. He said money currently wasted on hedge fund managers’ fees could be used for below-market loans to reduce college debt and help small businesses create jobs.
“The days of padding the pockets of a few lucky and connected Wall Street insiders with our money needs to end, and as governor I will see they do,” said Murphy. “We are not going to close the gaping pension deficit with costly and risky hedge fund investment schemes. We need to get back to stable investments that can produce predictable and solid returns at a fraction of the cost.”
As reported by The Star-Ledger, the pension funds closed the 2016 fiscal year on June 30 at $72.9 billion, down $6.1 billion from the prior year. The reason is that investments lost .87 percent over the year, unable to keep up with the payments to retirees from the funds. The leading loss category for the funds, it was reported, was hedge funds, in which nearly 12 percent of the pension funds were invested and which lost 13 percent over the year.
Hedge fund managers are paid hundreds of millions of dollars in fees, compounding the losses for taxpayers and retirees. In 2015, the State Investment Council paid $270 million in fees to hedge fund managers — $142 million of which was paid without regard to return. Even with the Council’s announcement last month that it would cut its holdings in hedge funds in half, fund managers would still be potentially pocketing tens of millions of tax dollars.
“On top of all of this, hedge fund managers receive favorable tax treatment, which needs to end,” said Murphy. “These fund managers get large investments from the state, and charge handsome fees without regard to performance. And then when they do receive performance fees, they are given a significant tax break on top of it. It’s unsustainable.”
Murphy noted that overall hedge fund performance also has lagged behind the returns of the S&P 500.
“Our investment strategy doesn’t need to be complex, it simply needs to be commonsense,” said Murphy. “But the single most important thing we can do to bring the funds back to health is for the state to finally pay its true share, and allow those investments to grow over the long term.”