San Francisco Pension Fund Risk

San Francisco’s Retirement Board has seven members, three elected and four appointed. They manage a Defined Benefit fund for the San Francisco Employees’ Retirement System (SFERS) on behalf of its 50,000 members.

The board sets policy for the fund, allocating the split between stocks, bonds, property, private equity and hedge funds. The board also oversees a $2.8B Deferred Compensation plan and selects investment options.

Two years ago the CIO recommended that $3B (15%) of assets should be in hedge funds. Police and fire unions strongly supported the 15% position. However, opposition by beneficiaries caused the hedge fund investment to be capped at $1B.

At the time the CIO was pushing for 15% in hedge funds, their high risk, high fees, and poor liquidity were in the news, as was the problem of hedge fund transparency. It seems memories fade fast in financial circles. Bankruptcy of Bear Stearns’ “High Quality” hedge fund in 2008 forced a bailout of the highly successful investment banking firm, which serves as a reminder of how the “straight rule” of induction lures Hume’s chicken into thinking the farmer has the chicken’s longevity in mind.

It may be that SFERS lacks even the sense of Hume’s chicken, which might have been skeptical had the farmer previously shown signs of interested not aligned with those of the chicken. SFERS’ misadventure in the FX Concepts “currency overlay” hedge fund in 2013 counts as such evidence.

In 2014 CalPERS (the CA Public Employees Retirement System) decided to move $4B out of hedge funds. Because of illiquidity of the funds, CalPERS still has positions in those funds.

In June 2016, the Retirement Board voted 4-1 to put $500M in a customized fund of hedge-funds program. Herb Meiberger, a commissioner of SFERS, asked for the names and funding amounts of the fund managers. Executive Director Jay Huish told Meiberger that info was confidential and that fund managers would be selected behind closed doors without disclosure or public involvement. More evidence.

Meiberger clearly takes a risk-based approach to governance, and stands out from a majority of “what could possibly go wrong”  board members. As psychologists have noted, humans are naturally ill-suited for rational assessment of risk. Meiberger is running for membership on the SFERS board again in January 2017. We need more officials that have a clue about risk management.


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