The $19.8bn Texas Employees Retirement System (ERS), which manages five retirement systems, is gearing up for its first hedge fund investment, HFMWeek can exclusively reveal.

Meanwhile, across the border in New Mexico, the state legislature has scrapped plans to force the region’s largest pension and endowment funds to set up investment advisory committees. The proposals would have added onerous steps to hedge funds dealing with the largest state investment agencies.

The two separate decisions show a strong appetite for hedge funds in both states, despite the prevailing political uncertainty surrounding the sector.

ERS deputy executive director of investments, Jacqueline Johnson outlined the retirement system’s plans for the portfolio in 2010, including the intention of moving towards a 5% allocation to hedge funds, during an investment committee meeting.

“We are still at the embryonic stage of that [hedge fund allocation] and we need to develop a strategy and plan for hedge funds then work towards the goal of 5%,” she said. The pension is also moving toward an 8% allocation in private equity and real estate, its other alternative investments.

The investment advisory committee is considering adding a new section to ERS’ Private Equity Policies and Procedures that allows the consideration of emerging managers across consulting, investment advising, brokerage services, hedge fund investment, private equity fund investment, and real estate investment. ERS employs Ennis Knupp as its general investment consultant, however it has not hired a specialist hedge fund advisor to date.

Although ERS operates an investment advisory committee, it will have been encouraged by the bill passed last week by its neighbours, New Mexico, which omitted proposed requirements on separate hedge fund investment advisory committees for large pensions and endowments in the state.

The proposed legislation, Senate Bill 18, sponsored by State Senator Timothy Keller, would have forced the $13.4bn New Mexico State Investment Council (SIC), the $9.2bn Public Employees Retirement Association (Pera) and the $6.5bn Educational Retirement Board (ERB) to set up alternatives investment advisory committees if any separate investment asset class, including hedge funds, exceeded $500m or 10% of the respective fund’s value.

The amended bill was passed on 18 February, revealed Keller. “The establishment of alternatives committees was amended out, primarily because SIC had a private equity committee that does a similar job and people thought it would create additional bureaucracy. I actually thought it would save time due to having expert individuals on the committees,” he said.

Senate Bill 18 was proposed in particular response to scrutiny faced by SIC and ERB over their exposure to pay-to-play scandals involving advisory firm Aldus Equity. The bill was drawn to address those issues in New Mexico State. It also proposed changes to the investment process, board make-up and board member conduct, as well as the decision-making process.

Charles Wollman, spokesperson for the SIC, told HFMWeek that an alternatives committee would have only affected SIC’s absolute return strategy, which is currently around 10% of the portfolio. “However the [absolute return target] range is 6% to 15%, so we could go higher and an alternatives committee may have required additional administration,” he said.

Furthermore, Pera and ERB were both excluded from the redrafted bill, and just the SIC will have to make changes to its board once the bill is signed.