After months of discussion and delays, the San Francisco Employees Retirement System on Wednesday voted to invest up to 5 percent of its assets in hedge funds.
The pension fund has not previously invested in hedge funds. Its investment staff had previously recommended a 10 and a 15 percent allocation, but the board voted 6-1 for a 5 percent investment.
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The staff, headed by William Coaker, who joined the pension system last February as chief investment officer, evaluated the new proposal and came up with another of its own, which was approved by the board.
It will reduce the target allocation for U.S. and foreign stocks to 40 percent from 47 percent, increase private equity investments to 18 percent from 16 percent, increase real assets including real estate to 17 percent from 12 percent, reduce bonds and other fixed income to 20 percent from 25 percent and increase hedge funds to 5 percent from zero.
It does not call for investing specifically in Bay Area real estate, which the fund already does to some extent.
Coaker said he wanted a stake in hedge funds to help reduce the portfolio’s volatility and prevent the steep losses suffered during the 2008 stock market crash. Its assets dropped from $17 billion before the crash to a low of $11 billion. To help make up the shortfall, the city and employees increased their contributions to the fund.
In a memo issued Wednesday, Coaker said the staff had “taken into account the concerns” of city workers and retirees, but said it still believes hedge funds “can play an important role to increase the stability of our funded status, improve our performance in down markets, reduce our beta (volatility), and increase or alpha (or excess returns over the broad market).”
The only board member who voted against the proposal was Herb Meiberger, who previously worked as a security analyst with the pension system. “I just don’t think this is the answer,” he said.
The San Francisco Employees’ Retirement System manages $20 billion in assets.
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