Proposed Investment in Bay Pond Partners, L.P. Fund

Memorandum to: State Investment Council
From: Christopher McDonough, Acting Director
Subject: Proposed Investment in Bay Pond Partners, L.P. Fund

The New Jersey Division of Investment (“Division”) is proposing an additional commitment of $50 million to Bay Pond Partners, L.P. (the “Fund”). This memorandum is presented to the State Investment Council (the “Council”) pursuant to N.J.A.C. 17:16-69.9.

The Division is recommending this investment based on the following factors:

  • Opportunity to expand investment with successful, experienced portfolio manager: The Fund is managed by Nick Adams, one of the most experienced and highly respected portfolio managers in the financial sector. Mr. Adams has been with Wellington since 1983, and has run Bay Pond since inception. Since the Division’s initial investment in April of 2012, the Fund has generated an annualized return of 8.82% through August 31, 2013, significantly outperforming the HFRI Equity Hedge Index return of 4.80% return over the same time period, resulting in approximately $19 million of net profits. On a 1-year basis, the Fund has returned 15.61%.
  • Attractive return profile: Since inception in 1994, the Fund has generated an annualized return of 21.87% through August 31, 2013, placing the fund in the top decile of long/short managers since inception and in the top quartile for all periods five years and longer. The Fund has materially outperformed the S&P 500 and the S&P 500 Financials Sector over the same time periods.
  • Wellington Asset Management Umbrella: With over $818 billion in assets under management, Wellington has a significant presence and long-term track record in nearly all sectors of the liquid, global securities markets. Portfolio managers with successful long-term long only track records are provided the opportunity to also evolve into Long/Short Equity sector portfolio managers. Bay Pond is also able to leverage the deep proprietary fundamental research that is generated by the financials team across the firm.
  • Favorable terms: The Division’s existing and proposed investment are at better than average hedge fund terms with a management fee of 1%, which is half the standard 2% charged by a majority of hedge funds.

A report of the Investment Policy Committee (“IPC”) summarizing the details of the proposed investment is attached.

Division Staff and its hedge fund consultant, Cliffwater LLC, undertook extensive due diligence on the proposed investment in accordance with the Division’s Alternative Investment Due Diligence Procedures.

As part of its due diligence process, staff determined that the fund has not engaged a third-party solicitor (a “placement agent”) in connection with New Jersey’s potential investment.

We will work with representatives of the Division of Law and outside counsel to review and negotiate specific terms of the legal documents to govern the investment. In addition, the proposed investment must comply with the Council’s regulation governing political contributions (N.J.A.C. 17:16-4).

Please note that the investment is authorized pursuant to Articles 69 and 100 of the Council’s regulations. The Bay Pond Partners, L.P. Fund will be considered an equity oriented hedge fund investment, as defined under N.J.A.C. 17:16-100.1.

A formal written due diligence report for the proposed investment was sent to each member of the IPC and a meeting of the Committee was held on November 8, 2013. In addition to the formal written due diligence report, all other information obtained by the Division on the investment was made available to the IPC.

We look forward to discussing the proposed investment at the Council’s November 21, 2013 meeting.

Source: State of New Jersey State Investment Council