Proposed Investment in Laurion Capital and Laurion Capital Global Markets Fund

Memorandum to: State Investment Council
From: Christopher McDonough, Director
Subject: Proposed Investment in Laurion Capital, LP and Laurion Capital Global Markets Fund Ltd.

The New Jersey Division of Investment (“Division”) is proposing an investment of up to $200 million in funds managed by Laurion Capital Management: up to $100 million to Laurion Capital, LP (the “Capital Fund”) and up to $100 million to Laurion Capital Global Markets Fund Ltd (the “Global Markets Fund”). This memorandum is presented to the State Investment Council (the “Council”) pursuant to N.J.A.C. 17:16-69.9.

Laurion Capital Management is a hedge fund manager based in New York that invests across major developed and emerging markets in equities, fixed income, currencies and rates. The Capital Fund is a multi-strategy fund, focused on volatility arbitrage and relative value strategies across a wide universe of markets and time frames with a focus on time horizons of three months or less. The Global Markets Fund, which is an extension of the Capital Fund, originally isolated specific sub-strategies of the Capital Fund in order to employ a more directional approach with greater return potential and higher volatility.

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

  • Excellent Risk Adjusted Return: The Capital Fund has generated a 13.86% annualized return since inception in September 2005 through April 2015, with a 5.75% standard deviation. The resulting Sharpe ratio of 2.0 places the fund’s risk-adjusted returns in the top 4th percentile against the HFRI Relative Value universe on a since inception basis as well as the 1st percentile against the HFRI universe since inception. The Capital Fund has never had a negative performance year in its track record, including in difficult markets such as in 2008, where the fund produced an impressive return of +32.79% compared to the HFRI Fund Weighted index loss of -19.03%. While the Global Markets Fund is a newer offering, the core of the fund is a subset of proven strategies from the Capital Fund. These strategies are used to identify more directional trade opportunities which would otherwise be limited due to the constraints of the Capital Fund. Since inception in March 2012 through April 2015, the Global Markets Fund has generated a 7.68% annualized return with 6.57% standard deviation. The resulting Sharpe Ratio of 1.12 places the Global Markets Fund’s risk-adjusted return in the 12th percentile against the HFRI Macro universe on a since inception basis as well as in the 11th percentile on 3-year basis against the HFRI Macro universe.
  • Differentiated return profile: The Capital Fund’s return exhibits nearly zero equity market beta. The Capital Fund’s correlation and beta to MSCI ACWI since inception is 0.14 and 0.05, respectively. The consistent returns combined with low beta exposure to the various markets (Russell 3000 index 0.00, Barclays High Yield Index -0.27) and low correlation to other hedge funds (correlation to HFRI RV 0.04 and HFRI Fund Weighted Index 0.04) makes the Capital Fund unique and complementary to the Pension Fund’s current portfolio. The Global Markets Fund’s returns exhibit low to negative equity market beta. The Global Markets Fund’s correlation and beta to MSCI ACWI since inception is 0.13 and 0.08, respectively. The consistent returns combined with low beta to the various markets (Russell 3000 index -0.50, Barclays High Yield Index 0.36, DJ UBS Commodity Index -0.25) and low correlation to other hedge funds (correlation to HFRI RV 0.00 and HFRI Fund Weighted Index 0.00) makes the Global Markets Fund unique and complementary to the Pension Fund’s current portfolio. In addition, investments in the Capital Fund and Global Markets Fund help to address the Division’s current underweight in the Absolute Return category.
  • Attractive Hybrid Approach: All of the hedge funds currently in the Division’s risk mitigating bucket are either fully systematic or discretionary in nature. In contrast, Laurion implements a hybrid approach which invests in a broad range of financial instruments by both model-driven trading strategies as well as discretionary-based trading strategies. This hybrid approach allows the team to identify and execute unique opportunities that their peers may not detect.

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. We have obtained a preliminary Disclosure Report of Political Contributions in accordance with the Council’s regulation governing political contributions (N.J.A.C. 17:16-4) and no political contributions have been disclosed. We will obtain an updated Disclosure Report at the time of closing.

Please note that the investment is authorized pursuant to Articles 69 and 100 of the Council’s regulations. Laurion Capital, LP and Laurion Capital Global Markets Fund Ltd., will be considered multi-strategy hedge fund investments, 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 July 9, 2015. 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 July 22, 2015 meeting.

Source: State of New Jersey State Investment Council