The board of the San Francisco Employees’ Retirement System voted Wednesday to postpone a decision on investing in hedge funds until February to give staff time to research an alternative proposal submitted Tuesday night.
The alternative calls for investing just 5 percent of the fund’s $20 billion in assets in hedge funds and — in a new twist — putting 3 percent in Bay Area real estate, which could include purchasing the system’s headquarters in San Francisco for around $100 million.
The system’s investment staff had recommended sinking $3 billion — 15 percent of the fund’s assets — in hedge funds as part of an asset-allocation overhaul. The goals included reducing volatility, improving performance in down markets and enhancing diversification. The system, which manages pension money for about 50,000 active and retired city workers, has never invested in hedge funds.
The staff also would have supported investing 10 or 12 percent in hedge funds, but didn’t want to go below that. “Without 10 percent, it wouldn’t be a meaningful hedge against a down market. We felt that was an absolute minimum,” Jay Huish, the system’s executive director, said in an interview last month.
Some board members were reluctant to make that big a commitment to hedge funds, especially after the giant California Public Employees’ Retirement System announced Sept. 15 that it will exit all hedge funds over the next year “as part of an ongoing effort to reduce complexity and costs in its investment program.” At that time, CalPERS had $4 billion, or 1.4 percent of its assets, in hedge funds. San Francisco’s system would have been one of the first public pension funds to make a major decision on hedge funds since then.
At Tuesday’s meeting, about 30 active and retired city employees begged the board not to invest 15 percent in hedge funds. Among their arguments: Hedge funds are too risky, illiquid, not transparent, charge excessive fees and may amplify systemic risks in the financial system.
Only one spoke in favor of it: Mike Hebel, who represents the San Francisco Police Officers Association. He said the portfolio needs a makeover to prevent another hit like it took in the 2008-09 market crash, and hedge funds should be part of that.
The value of its investments fell by about $6.3 billion or 36 percent during that period. Its funding status fell from 104 percent in 2008 (meaning it had more than enough assets to meet estimated obligations) to 81 percent in 2013. As a result, the city had to increase its contributions to the fund. A measure approved by San Francisco voters in November 2011 required most employees to increase their contributions and trimmed some pension benefits.
Its funding status has since rebounded to 93 percent, and Huish said that pension contributions are expected to be come down in 2015.
To reduce those kind of wild swings, the staff this year recommended a new target asset allocation: U.S. and foreign stocks would drop to 35 percent from 47 percent of assets. Bonds and other fixed-income would fall to 15 percent from 25 percent. Real estate would rise to 17 percent from 12 percent. Private equity would rise to 18 percent from 16 percent. And hedge funds would go to 15 percent from zero. (Its actual allocation is somewhat different.)
Last week, board president Victor Makras proposed two new asset allocations, but neither included hedge funds.
Tuesday night, he submitted a third, dubbed the “alternative specified mix.” Like the staff recommendation, it calls for investing 35 percent in global equities and 15 percent in bonds and 17 percent in real estate. But it put only 5 percent in hedge funds and increased private equity to 21 percent. It would add three new asset classes: 2 percent in infrastructure, 2 percent in natural resources and 3 percent in Bay Area real estate.
A vote on any new allocation has been postponed until the board’s next meeting, at 1 p.m. Feb. 11, to give the staff time to do due diligence on the new proposals.
Herb Meiberger is the only one of the seven board members who has openly opposed any investment in hedge funds. As for the 5 percent proposal, he said, “Anything less than 15 percent is moving in the right direction. There is an appetite among the majority of the board to invest in hedge funds.”
Kathleen Pender is a San Francisco Chronicle columnist. Net Worth runs Tuesdays, Thursdays and Sundays. E-mail: email@example.com Blog: http://blog.sfgate.com/pender Twitter: @kathpender