SAN DIEGO — A hedge fund by any other name would smell as sweet. Or perhaps sweeter.
Following news that the San Diego County Employees' Retirement Association had lost close to 50% of its $175 million investment with Amaranth Advisors LLC, officials at the $7.7 billion pension fund decided to set the record straight. Amaranth is the Greenwich, Conn.-basedmultistrategy hedge fund that lost $6 billion within two weeks on a bad bet on natural gas prices.
At an Oct. 19 educational workshop on hedge fund investments, San Diego fund officials proclaimed that, contrary to popular perception, the fund did not have one-fifth of its assets invested in hedge funds.
"It's been bruited about that SDCERA has 20% of its assets in hedge funds. And that's not the case," Chief Investment Officer David Deutsch told the board.
Rather, Mr. Deutsch drew a line between high-risk hedge funds and low-risk absolute return strategies.
But observers said the line Mr. Deutsch was drawing is imaginary.
"It's two sides of the same coin. It's just that people are trying to get T-bill-plus returns with capital preservation in many strategies. But the reality is that every strategy has risk," said Jim McKee, director of hedge fund research at Callan Associates Inc., San Francisco.
Mr. Deutsch said both hedge funds and absolute return strategies are employed in the pension fund's $1.5 billion "alpha engine," which replaces conventional U.S. large-cap exposure with a variety of alpha-generating strategies transported onto Standard & Poor's 500 derivatives contracts.
Hedge funds, Mr. Deutsch elaborated, tend to be higher volatility strategies that often employ leverage, short selling and lockup periods, and may or may not be registered with the U.S. Securities and Exchange Commission.
In contrast, absolute return strategies tend to have lower volatility and are designed to produce consistent risk-controlled returns, he said. Such strategies include market neutral, fixed-income arbitrage and enhanced cash portfolios.
Mr. Deutsch said the San Diego fund uses a "barbelled" structure for its alpha engine, combining higher-risk hedge funds and lower-risk absolute return strategies.
He added the SEC uses a different definition of hedge funds, based not on funds' hedging techniques, but on their status as private and unregistered investment pools.
Using Mr. Deutsch's definition, the fund had only 8.44% of assets invested in hedge funds as of June 30, before Amaranth's late September implosion. (The firm is in the process of closing.)
As of Oct. 13, the San Diego fund was left with 6.07% of its assets in hedge funds. Another 4.91% were in market-neutral, 1.95% in global macro and 5.34% in fixed-income and cash strategies.