San Francisco City & County Employees’ Retirement System approved a plan Wednesday night to begin investing in hedge funds.
The 5% allocation to hedge funds — $1 billion of the $20 billion pension fund’s assets — is a scaled-down version of Chief Investment Officer William Coaker Jr.’s proposal to invest $3 billion in hedge funds, or 15% of assets.
Mr. Coaker scrapped that plan last week in the face of strong objections from board members who thought it was too risky and revised his proposal, recommending a 10% allocation.
But Mr. Coaker also said he could accept a 5% allocation, a number proposed by Board President Victor Makras as a compromise in December.
The new asset allocation plan would also increase private equity to 18% from 16% and real assets to 17% from 12%. Global equity will be reduced to 40% from 47%, and fixed income to 20% from 25%.
Dozens of current and former San Francisco employees denounced the plan, saying that board members were putting their pension benefits at risk. Mr. Coaker said the opposite was true, that he was trying to reduce the volatility of the pension fund’s returns in the event of a downturn. He said the pension plan’s funded status had fallen by more than half in the financial crisis because of the retirement system’s concentration in growth assets such as equities. The funding level was 72% in 2009 vs. 178% in 2000. Mr. Coaker said the funded status was 93% as of June 30.
The 5% hedge fund allocation reduces the pension fund’s volatility only slightly, Mr. Coaker told the board, saying 10% would make a more significant impact. Mr. Makras said the board wanted to start small and could approve increases to the hedge fund program to the 10% allocation if everything went smoothly after a year or so.
Mr. Coaker came under intense questioning from board members who echoed comments from the audience, asking how transparent hedge fund investments would be. “We don't want a Bernie Madoff hedge fund,” said Wendy Paskin-Jordan, a board member.
One board member voted against the plan. Herb Meiberger has been staunch in his opposition. He said Wednesday that hedge fund transparency would be difficult to obtain and repeatedly questioned Mr. Coaker on whether hedge fund managers would reimburse the pension fund for any losses. Mr. Coaker said there would not be direct reimbursement, but managers would not take any profit on future investment returns until recovering from initial losses.
Mr. Coaker said only hedge funds with strong transparency will be hired.
Wednesday’s vote had been closely watched by many, coming in light of the decision in September by the $295.7 billion California Public Employees’ Retirement System, Sacramento, to abandon its hedge fund program.
Mr. Coaker said he had talked to CalPERS Chief Investment Officer Theodore Eliopoulos, who said he was not opposed to hedge funds. He said the CalPERS situation was different from San Francisco’s, noting officials at the nation’s largest defined benefit system felt it was too difficult to scale the program to the size needed to make a significant contribution to returns.
Mr. Coaker said investment staff will issue a request for proposals next month to hire a hedge fund consultant and will also start recruiting an in-house hedge fund staff. He said the program could start in late 2015 or early 2016.
Mr. Coaker said he favored direct hedge fund investments over funds of funds, noting returns have been better and the pension fund would have direct control of managers.