New Jersey bets on opportunistic credit and hedge funds

The US pension plan is moving towards more opportunistic credit-related strategies at the expense of traditional fixed income.

The New Jersey Division of Investments, which handles $77 billion of the Garden State’s pension funds, is increasing its target allocations to global diversified credit and credit hedge funds, while its overall allocation to the ‘income’ bucket, which groups together its public and private credit and bond investments, is decreasing.

At a recent meeting, the State Investment Council, which oversees the DOI’s activities, voted to approve the Fiscal Year 2015 plan (which runs from the beginning of this month to June 30, 2015) that includes a new 5 percent allocation to ‘global diversified credit’, which would house opportunistic “go-anywhere” credit funds like the ones managed by Apollo or Fortress.

It also raised the credit-oriented hedge funds allocation slightly to 4 percent from 3.5 percent. New Jersey has already made some investments in these areas, and currently has 2.84 percent invested in global diversified credit and 2.95 percent in credit-oriented hedge funds.

All the other ‘income’ categories, including high yield, investment grade credit, debt-related private equity, real estate debt and mortgages are being reduced by 1-2 percentage points or less and the income bucket is dropping to a 22.6 percent target from a 26.3 percent target in total.

Overall, New Jersey is adopting a more conservative or defensive stance this year and putting more money in its ‘liquidity’ bucket, which houses cash and short-term equivalents, TIPS and US Treasuries. That category’s target is almost doubling to 8.25 percent from 4.5 percent, while its global growth portfolio, which includes public and private equity, is also going down top 57.9 percent from 59.7 percent.

The target allocation to real assets is going up slightly: to 7.25 percent from 6 percent, where private real assets section has an inaugural target of 2 percent, while real estate equity is going up to a 4.25 percent target from a 3.5 percent target (commodities meanwhile, are dropping to 1 percent from 2.5 percent).

The remaining allocation bucket is risk mitigation, which includes absolute return hedge funds. They’re going down to a 4 percent target from 3.5 percent. New Jersey already had 4.05 percent invested in that space in May this year, so it’s on track for the reduced exposure there.

The presentation on the asset allocation changes said the plan was already adjusted significantly in late 2013 with increases to risk mitigation strategies and liquidity and decreases to global growth. This year’s update represents a further move in that direction.

“Based on current market condition, the Division believes a more conservative allocation is still warranted,” the presentation said.

Low expected returns from traditional fixed-income in a rising interest rate environment were also cited as a reason for reducing investment-grade credit and high yield bonds, but those should be offset by the rise in global diversified credit and credit oriented hedge funds.

Chris McDonough, who was previously the deputy director of investments at the New Jersey pension fund, took over the reigns as director of investments in March, when the previous director, Timothy Walsh, left to run the North American business of Hong Kong-based real estate firm, Gaw Capital Partners. Jason McDonald leads the private markets investment team, while Maneck Kotwal oversees hedge funds. Hewitt Ennis Knupp is the pension plan’s general consultant and advised in the drafting of the investment plan.