New Jersey Gets Okay to Invest $9 Billion in Alternatives
Star-Ledger reporter, Dunstan McNichol, reports of a now-settled legal tussle between municipal worker unions and the State of New Jersey ("Court OK's Jersey plan to invest pension money in hedge funds," August 23, 2008). At the heart of the matter is The Garden State's desire to allocate 10+ percent of its $78 billion retirement system assets to hedge funds and other non-traditional investments as a way to avoid getting slammed when stock markets sour. (Unions have described alternatives as risky.) At the same time, "Court lets NJ invest pension money in hedge funds" (The Associated Press, August 23, 2008), reports a recent actuarial analysis that puts the shortfall as bigger than originally believed, due to a surge in police and firefighters who "are retiring with disabilities."
According to statistics published by the State of New Jersey, Department of the Treasury, Division of Investment, the alternatives portfolio (commodities, real estate, private equity and hedge funds is 11.7 percent (versus a target allocation of 10.3 percent) as of June 30, 2008. In its press release, dated July 15, 2008, the recent loss of 3.1 percent (at mid-year 2008) still leaves a five-year average return of 9.1 percent, higher than "the assumed actuarial investment return of 8.25 percent." Division Director William Clark credits alternatives for avoiding a loss of approximately $3 billion, had the pension's asset mix "not been diversified away from its historic concentration purely on equities and bonds."
New Jersey is not alone in seeking alternatives as a diversifier. Yet there remains a critical question as to when and why equities are deemed "riskier" than alternatives. Of course, one must be particularly careful with his or her answer. Market capitalization, strategy, relevant time period, restrictions on transferability and industry and economic fundamentals are a few of the many determinants of risk (financial and otherwise) that distinguish traditional equity holdings from alternatives.
Editor's Note: To learn more about official symbols, including the State Seal, visit the State of New Jersey website.
