San Francisco City & County Employees’ Retirement System hired Blackstone Alternative Asset Management to run a $500 million customized hedge fund-of-funds program and to act as an adviser for the $20 billion pension fund’s planned $500 million direct hedge fund investment program.
The 4-1 vote at Wednesday’s board meeting, however, came with lots of questions by board members over the riskiness of a hedge fund program, issues that have come up constantly since Chief Investment Officer William Coaker Jr. first proposed that the pension fund invest in hedge funds more than two years ago. A new 5% allocation to hedge funds was approved by the board in February 2015; this is the first investment.
Board members questioned Blackstone officials about comments by Tony James, Blackstone Group president and chief operating officer, at a Toronto conference in May that hedge funds might lose about a quarter of their assets in the next year as performance slumps.
Gideon Berger, senior managing director at Blackstone Alternative Asset Management, told board members that the second part of Mr. James comments were not reported — that institutional-quality hedge funds will perform well.
Mr. Berger said only top-performing funds that meet Blackstone’s due diligence will be part of the customized hedge fund lineup that Blackstone will create for the pension fund.
Mr. Berger’s comments did not deter board member Herb Meiberger from voting against the hedge fund investments, saying they were risky and posed liquidity concerns.
Mr. Coaker originally wanted to allocate 15% of the total portfolio to hedge funds. He scaled it back after board members refused to approve it.
Mr. Coaker has maintained that hedge funds will provide downside protection from a slide in equity markets if another financial crisis occurs.
Separately, Mr. Coaker said in an interview that he expects the board will consider the issue of investing in two managers that invest in China A shares in the next several months.
The board was slated to vote on allocating up to $200 million each for two Beijing-based managers, Cephei Capital and Springs Capital, at its May 9 meeting.
Mr. Coaker said the retirement system’s general consultant NEPC will be conducting due diligence on the two managers.
Also Wednesday, the board approved hiring Callan Associates as its general investment consultant for its $2.8 billion deferred compensation program. Callan, whose contract starts July 1, replaces Angeles Investment Advisors, which rebid.
The board also put Russell Investments on its watchlist following the departure of John Greves, who was the lead consultant in charge of developing the glidepath for the DC program’s target-date funds.
Russell’s was selected earlier in the year for a new contract starting July 1, but that contract is now on hold. Board Secretary Norm Nickens said instead Russell’s current contract, which expires June 30, may be extended for six months.
In other action, the board disclosed it committed up to $515 million to eight funds in closed session in March, April and May.
At a meeting March 9, the board committed up to $225 million to two Vista Equity Partners private equity funds — up to $100 million to Vista Equity Partners Fund VI, and up to $125 million to Vista Foundation Fund III.
At a meeting April 13, the board committed up to $100 million to Carmel Partners Investment Fund VI; up to $50 million each to Oak Hill Advisors Strategic Credit Fund II and ABRY Partners’ ABRY Heritage Fund; and up to $40 million to Longitude Venture Partners III, managed Longitude Capital.
At a meeting on May 9, the board committed up to $50 million combined to Centerbridge Special Credit Partners III and Centerbridge Special Credit Partners III-Flex, managed by Centerbridge Capital Partners.