Up in Smoke. N.J. loses $16 million in hedge-fund crash

N.J. loses $16 million in hedge-fund crash
September 22, 2006  Star-Ledger
New Jersey's foray into high-risk investing suffered a setback this week as the implosion of a Greenwich, Conn., hedge fund swallowed up about $16 million in state funds, including millions that had been in vested just weeks ago.

Orin Kramer, chairman of the State Investment Council, said the losses are indirect holdings the state's pension funds had in Amaranth Advisors, a hedge fund that lost almost two-thirds of its $9.2 billion value this month when its bets on the future price of natural gas contracts proved wrong.

About $25 million of the state's $73 billion pension investment portfolio was in Aramanth, under a new state policy designed to diversify the state's holdings. The Aramanth loss pales in comparison to the billions of dollars the retirement accounts lost during the stock market collapse of 2001, but Kramer acknowledged the symbolic impact of the loss.

"A $16 million hedge fund loss has a public resonance that you're not going to get by losing $325 million on five stocks," said Kramer, who briefed members of the Investment Council on the loss during their regular meeting in New Brunswick yesterday. "Which is why the division and I are doing an in-depth post-mortem to try to discern what lessons we can learn."

The New Jersey Education Association, which represents teachers whose pension fund makes up the largest share of state retirement accounts, is troubled by the Aramanth losses, a spokesman said.

"NJEA is very concerned that they do not have the capacity to oversee investments by external managers to see that the investments of funds for public employees are protected," said Brian Volz, an NJEA spokesman who attended yesterday's meeting.

The NJEA and the Communica tions Workers of America, the largest state workers' union, have opposed the shift into riskier, privately managed investments, say ing they open the retirement fund up to potential losses and political interference.

New Jersey's cash made it to Aramanth through three mutual funds the state invested in as part of its growing involvement in investment alternatives to the stock market. The funds are Goldman Sachs Hedge Funds Partners, Arden Alternative Advisors and the Rock Creek Fund in Washington, D.C.

The investments in the Goldman Sachs and Rock Creek funds were made Sept. 1, Kramer said, only two weeks before the Connecticut hedge fund's collapse.

Each of the funds collects a management fee of about 1 percent of the state's investment, plus performance fees ranging from 5 percent to 10 percent, information presented to the Investment Council earlier this year shows.

The money in the funds is among $732 million in alternative investments the state has made since launching its diversification strategy last year. By June of next year, the council hopes to have about $10.4 billion invested in the alternative holdings, and expects to be paying managers about $221 million in annual fees.

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