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San Francisco City & County dials back proposed hedge fund allocation to 5%

Pension fund to vote on plan in February that also adds infrastructure, natural resources

San Francisco City & County Employees' Retirement System Chief Investment Officer William Coaker Jr.'s controversial plan to invest 15% of the pension fund's assets in hedge funds is dead.

After the board of the $20 billion pension fund axed Mr. Coaker's idea on Wednesday, a compromise proposal was introduced, allocating 5% of assets to hedge funds.

But the 5%, which appears to have the support of most of the board, is not a done deal. That proposal was tabled for two months to give board members time to study it.

A new vote is now scheduled for the board's regular meeting Feb. 11.

Board members have debated the plan since February, repeatedly delaying a vote.

The new hedge fund proposal is part of a compromise among Victor Makras, board president; Jay Huish, CEO; and Mr. Coaker.

The trio's proposal also calls for first-time allocations of 2% each to infrastructure and natural resources. They also created a special San Francisco Bay Area core real estate allocation of 3%.

They also proposed increasing private equity to 21% from 16%; increasing real assets, which includes real estate, to 17% from 12%; decreasing global equity to 35% from 47%; and decreasing fixed income to 15% from 25%.

But even the smaller hedge fund allocation didn't meet the approval of dozens of current and retired city workers. They took turns for the better course of two hours denouncing pension fund officials for risking their retirement money.

“It's a smart plan,” Mr. Makras said in an interview following the meeting. He acknowledged he had been uncomfortable with the 15% allocation, but felt some hedge fund exposure was needed.

Mr. Huish, in a separate interview, said the 5% hedge fund allocation would be inadequate, adding that he and Mr. Coaker believe it will be a good start. Mr. Huish said he hopes the allocation will double once pension fund officials prove they can successfully run a hedge fund program. He said a 10% exposure is what is needed to make it meaningful.

Mr. Coaker has argued for the better part of a year that without a large allocation to hedge funds, the pension fund would be vulnerable to severe losses in the event of an economic downturn.