By Anastasia Donde

While many large U.S. pension funds are eager to invest more in hedge funds and other alternative investment funds, they are often hamstrung by strict legislative guidelines that set hard limits on how much they can allocate to these types of managers. But the state of New Jersey is fighting those limits in order to boost its exposure to these funds, a move that the state’s former investment council chairman says is long overdue.

"If New Jersey had invested 12% each in hedge funds, private equity and real estate a decade ago and achieved median returns in each area, they’d have $20 billion more than they have today," says Orin Kramer, the former chairman of the State Investment Council, which oversees investment strategy and asset allocation for the state’s pension, the $68 billion New Jersey Division of Investment.

Kramer, who is no longer chairman but still serves on the council, and the pension’s consultant, Strategic Investment Solutions, argue that the pension fund could earn better returns with lower risk if it was allowed to put more money into hedge funds and other alternative investments. This could also improve the division’s funding status, or the ratio of its existing assets to liabilities. To that end, the council recently voted to raise the limit on how much of its total assets the pension can invest in alternatives to 38% from 28%, and to raise the cap on hedge funds to 15% from 7%.

New council chairman Robert Grady says that raising the limits "could give the division more flexibility in achieving a diversified portfolio and maximize returns while appropriately managing risk." Grady, who is a managing director of the Cheyenne Capital Fund, a private equity vehicle, and former partner at the Carlyle Group, became chairman of the council in September. Kramer is also a general partner of New York hedge fund Boston Provident Partners.

The vote was a victory for Kramer, who has worked for several years to get the pension to ramp up its exposure to these investments, particularly hedge funds. Kramer recently conducted an analysis of U.S. pension plans’ funding statuses and the historical returns produced by alternative investment funds versus traditional investments. He contends that pension funds, like many endowments and foundations, would have performed much better over the past 10 years had they invested more in alternatives.

The study was conducted with the help of Strategic Investment Solutions, which is based in San Francisco. Pete Keliuotis, a managing director at the firm, presented several different proposed asset allocation strategies to the council, and the pension said that the strategies with higher allocations to alternative investments had "a substantially higher expected return, with modestly higher risk than the current mix," according to the firm.