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Christie Administration, Unions Battling Over Hedge Fund Fees, Contributions

Union leader urges Treasury to complete pay-to-play probe, questions investment with firm whose principals donated to RNC

robert grady
Credit: NJTV
Robert Grady, chairman of the State Investment Commission, being interviewed on NJTV.

One day after it was disclosed that New Jersey had quietly sold its $9.6 million investment in a hedge fund that sparked pay-to-play allegations in two states, members of the State Investment Council yesterday clashed over whether to invest $100 million in another hedge fund whose executives had donated large sums to the Republican National Committee. Yesterday’s dispute was just the latest skirmish in a public battle over the fees paid to Wall Street firms for investments in hedge funds -- aggressively managed funds that use advanced investment strategies and usually require their institutional and wealthy investors to keep their money in the fund for a year or more -- and the millions in contributions that the “masters of the universe” who run them pour into political campaigns.

It is a battle that is being waged against the backdrop of Christie’s $2.4 billion cut in state pension contributions, his appointment of a Pension and Health Benefits Commission charged with making further cost cuts, and Christie’s mounting undeclared candidacy for the 2016 GOP presidential nomination.

And it is a battle that was jacked up another notch when state AFL-CIO President Charle Wowkanech filed a complaint last week with the State Ethics Commission charging that the State Investment Commission under Chairman Robert Grady, who is also a longtime Christie political adviser, had funneled lucrative pension fund contracts to hedge funds whose executives had contributed to Christie and to other Republican campaigns.

The Treasury Department’s sale of its $9.6 million investment in General Capital Partners earlier this month seemed designed to put an end to the controversy surrounding the award of the contract to the firm just seven months after one of its executives, Charlie Baker, now the Massachusetts Republican candidate for governor, gave $10,000 to the New Jersey Republican State Committee.

However, Adam Liebtag, president of Communications Workers of America Local 1036, yesterday insisted that state Treasury officials complete their internal review of the pay-to-play allegations involved in the Baker case. Martha Coakley, Baker’s Democratic opponent, has turned the case into a campaign issue in Massachusetts.

The General Capital Partners investment also could be considered a violation of New Jersey’s conflicts of interest law barring investments in firms whose investment management professionals made campaign contributions in New Jersey. The Baker contribution was not reported by General Catalyst Partners on the grounds that Baker was an “executive-in-residence” and not a fulltime employee.

Liebtag also questioned the recommendation by the Treasury Department and the council’s investment committee to put $100,000 into a second hedge fund, Hellmann Capital Partners VIII, L.P., on the grounds that he had discovered that two firm executives had made substantial contributions to the Republican National Committee in 2012.

The CWA union leader accepted the ruling by a Christie administration lawyer that current regulations and pay-to-play rules do not prohibit state investment in hedge funds whose executives have given to federal campaigns or committees, but he said the council should consider revising its rules to include contributions to groups like the RNC to eliminate “the perception of conflicts of interest.”

While Liebtag, the AFL-CIO representative on the council, never mentioned the AFL-CIO’s complaint against Grady, his suggestion that the council consider expanding its regulations to prohibit investments with any hedge fund whose employees had made any political contributions at the national level would virtually force New Jersey out of hedge funds altogether.

That’s a step that the California Public Employee Retirement System (CALPERS), the nation’s largest state pension system, took Monday when it decided to sell off all of its $4 billion in hedge fund holdings.

Liebtag’s criticism -- and a series of critical articles by International Business Times reporter David Sirota, previously a Democratic political consultant -- led Grady and Tom Byrne, the council’s Democratic vice chairman, to repeatedly defend the importance of diversification in hedge funds and other alternative investments during yesterday’s council meeting.

Grady noted that New Jersey made money on its January 2012 investment with General Catalyst Partners, the firm connected to Baker. New Jersey’s $9,675,000 stake was sold to Washington University for $14,120,161 -- a 46 percent return on investment.

Byrne, who may be gambling with his political future in the Democratic Party by serving on Christie’s pension committee, questioned the focus on hedge fund fees, which generally include incentive payments on top of upfront 2 percent management fees. “There is no state that handles private equity in-house (within its investment division),” Byrne noted. “We made 25 percent last year. You have to hire experts -- and most of the fee is in incentive fees. If they can make 25 percent for us, God bless them.”

According to Treasury’s report for the June 30 end of the 2014 fiscal year, New Jersey’s private equity portfolio represented $6.9 billion of its $80 billion portfolio, and that the state earned 23.47 percent, or an estimated $1.3 billion profit, last year. Grady noted that New Jersey’s private equity portfolio has consistently outperformed benchmark competitors by at least a 2-1 profit margin over the past five years.

Liebtag’s criticisms also sparked a heated rebuke from Guy Haselmann, a Christie appointee to the board, who warned that the work of the board was becoming “politicized.”

“To me , this AFL-CIO lawsuit I find it to be a political stunt,” Haselmann said angrily, looking straight at Liebtag. “You don’t like the fact pension reform is happening and structural reforms have to be made. The fact is reform is good. The pension fund will go to zero if nothing is done. It’s a ticking time bomb. That’s a fact, and I’m sorry if I’m going in a direction no one likes.”

Haselmann went on to defend Grady’s integrity. “He has never politicized this board,” Haselmann insisted.

“I haven’t mentioned anything personal about anyone,” Liebtag retorted. “I agree with you that politics should not be involved in investment decisions. We talk about returns, but that doesn’t mean there is not an impression of impropriety. Hedge fund managers have a lot of money. They are active politically. I agree with you politics has no place at the table. But the fact that we’re not talking about the issue doesn’t mean it’s not there. “

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