The workshop scheduled today to educate the public about the county pension system’s investment in hedge didn’t start out so good. The fund’s sharp new office complex had a few technical bugs. But they soon got it going.

The effort clearly had two goals:

  • To minimize, in the public’s mind, how much of the pension fund’s investments were actually in hedge funds.
  • To portray hedge fund investments as less risky than we in the press have represented.

Did they succeed? Well, on the first point – the effort to show how little exposure the system has to “hedge funds” – it didn’t go so smoothly. The impression, fostered by county officials themselves, had been that the county had about 10 investments in separate individual hedge funds.

But David Deutsch, the chief investment officer of the pension system, announced to the surprise of many it seemed, that the real number of hedge funds in the portfolio was only three. Then his assistant started arguing with him and, for a minute or two, in front of a packed meeting with trustees watching, the two tried to figure out what they were talking about. They finally decided, after all, that there were only four hedge funds.

Then Deutsch changed his mind again and leaned into the microphone to announce that actually, there was only two.

It was a question of the definition of “hedge funds,” Deutsch said, and he tried repeatedly to explain the difference between his definition and the definition the Securities and Exchange Commission uses. The system didn’t really have that many investments in actual “hedge funds.”

It was all very confusing.

But, despite their own confusion, they argued that the term “hedge fund” had been used too liberally by, especially, the media. And the fact that the system had 20 percent of its portfolio in hedge funds was a myth we media types had perpetuated.

Truth was, Deutsch said, the fund’s exposure to real “hedge funds” was more like 8.4 percent. And now that Amaranth collapsed, that exposure had fallen to 6.1 percent.

I guess that’s one way to lower your exposure to hedge funds – just have them lose all your money.

But where in the world would we have gotten the idea that the pension fund had 20 percent of its portfolio in hedge funds?

Well, that’s what they told us.

This is what county pension CEO Brian White told me the day the news about Amaranth’s implosion spread (emphasis added):

Of course we’re concerned with the results and the issues with regard to Amaranth. But they’re one of 10 hedge funds we’ve invested in and we believe the risk is diversified.

He’s the one who called those 10 funds “hedge funds” and if you add up how much money they managed, it equals 20 percent of the pension system’s total assets.

David Deutsch himself at the Sept. 21 meeting of the pension fund confirmed that “one-fifth” of the portfolio he oversees was in hedge funds.

Finally, there’s this. On the county pension website, for months, it has advertised and directed interested persons to this article about Deutsch. It appeared in Institutional Investors’ Alpha magazine, which the pension system describes as “a publication for and about the hedge fund industry.”

One would assume that the magazine might know what a “hedge fund” is and this is what it reports:

As of September 30, 2005, the county had $1.3 billion in hedge funds, about one-fifth of its $6.8 billion in assets.

Again, pension officials were really proud of this article. Here’s what they said about it.

The story covers Deutsch’s impressive career and details his investment philosophy, as well as the role he has played in SDCERA’s own notable investment performance.

If it’s so detailed and worthy of the website’s audience’s attention, it must be trustworthy, right?

OK, so maybe they’re not so good at minimizing the perception that they have a lot of money in hedge funds.

So what was the second part of their goal, again? Ah right, to portray hedge funds as less risky, and, in fact, quite valuable tools for their investment strategy.

The pension system flew out a professor from Yale, an expert on hedge funds, to explain them and to answer some questions from the board. His name was William N. Goetzmann,

His message was simple: If you diversify your investments – don’t put all your eggs in one hedge fund – you’ll be able to handle the Amaranths of the world: “If something bad happens,” Goetzmann said, “it’s just a blip.”

He said he believes “there’s a role for hedge funds in investment portfolios.”

Finally, they tried to get him to say numerous times that investing in hedge funds was actually less risky than investing in regular stocks. He only said that investing in one hedge fund is no more risky than investing in one stock.


The price of one stock can go up or down quite a bit in a matter of hours.

So they asked him about a portfolio: Would a portfolio of hedge funds be more risky than a portfolio of stocks?

He said he “didn’t have the numbers” with him but he thinks it wouldn’t be. The county should run those numbers itself to prove his hypothesis, he said.

This was about three hours into the “workshop” and I had to leave.

The truth is there’s something contradictory about trying to minimize the perception that hedge funds are risky at the same time your try to minimize the perception that you have a lot of investments in hedge funds.

If hedge funds are so great, why wouldn’t you just be proud of how many you have in your portfolio – like the county pension guys were before the Amaranth crash?

I guess I just answered my own question.


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