Proposed Investment in Iguazu Partners, L.P.

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

The New Jersey Division of Investment (“Division”) is proposing an investment of up to $150 million in Iguazu Partners, L.P. Fund (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:

  • Attractive risk/return profile: Iguazu has generated a 9.16% annualized return from inception in February 2006 through August 2013, with 3.98% standard deviation resulting in Sharpe Ratio of 1.90, placing the Fund’s risk-adjusted returns in the top quartile against the HFRI universe across all time periods. During a difficult 2008 investment environment, the Fund performed much better than the market, and has produced positive performance in every calendar year since inception.
  • Flexible mandate: Iguazu is a Long/Short debt fund focused on the emerging markets but has a flexible mandate to invest in a broad range of instruments, including external debt, local debt, rates and currencies. The unconstrained absolute return approach utilized by the Fund provides them the flexibility to pursue and exploit dislocations in an inefficient asset class.
  • Opportunity to expand investment with successful, experienced asset management firm: Wellington Management is a recognized industry leader in emerging markets debt investing, with $31.0 billion in dedicated assets. Iguazu leverages Wellington’s proprietary Emerging Market Debt research for their bottom-up, deep fundamental approach.
  • Experienced portfolio manager with successful career in Emerging Markets: James W. Valone is the Portfolio Manager of Iguazu and serves as the chair of Wellington Management’s Emerging Markets Debt Strategy Group. Having joined Wellington in 1999, Mr. Valone is currently a Partner with the firm and has over twenty years of experience investing in the emerging markets.
  • Favorable terms: The Division’s proposed investment has a management fee of 1%, half the standard 2% charged by a majority of hedge funds.
  • Diversification benefit: Iguazu provides direct emerging markets exposure in the Division’s Hedge Fund portfolio, which currently has approximately $350 million in emerging markets exposure, primarily through fund of funds. In addition, an investment in Iguazu helps to address the Division’s current underweight in the Absolute Return bucket.

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 Iguazu Partners, L.P. Fund will be considered an opportunistic 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