Following news that New Jersey’s pension system lost more than $6 billion last year due to the poor performance of a hedge fund-heavy portfolio, one of the leading candidates to succeed Governor Chris Christie called for reform Monday.
Former U.S. Ambassador to Germany and Goldman Sachs executive Phil Murphy said that he wants to see the state shift away from investments in risky but potentially high-return hedge funds in favor of a public bank.
The state’s pension system, which has gone underfunded by as much as $80 billion during Christie’s tenure, closed the 2016 fiscal year at $72.9 billion—down $6.1 billion from the year before. Hedge funds’ 12 percent share of the funds led the pack in losses by hemorrhaging 13 percent of their value.
“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,” Murphy wrote in a statement. “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.
“On top of all of this, hedge fund managers receive favorable tax treatment, which needs to end. 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.”
Last year, the State Investment Council paid $270 million in fees to hedge fund managers with $142 million of that sum not contingent on performance. The Council agreed to cut the state’s investment of pension dollars in hedge funds by more than half in August, from 12.5 percent to 6 percent.
Murphy, who may have a decisive edge in the Democratic primary after former rival and Jersey City Mayor Steve Fulop endorsed his campaign last week, has hung his economic platform on the public bank proposal so far. Christie, who will be term-limited out in 2018, has called the idea “misguided.”