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Thursday, March 5, 2009 | After absorbing devastating investment losses and facing worries that a major hedge fund investment might be lost, the chief investment officer at San Diego County’s pension system abruptly resigned Thursday.

The resignation of Chief Investment Officer David Deutsch came amid increasing tension among leaders of the beleaguered fund. Deutsch claimed the board that was too controlling for his liking, while trustees expressed some of their most stinging criticisms that the hedge fund strategy Deutsch championed had led the pension astray. The board demanded answers Thursday not only about the collapse of WG Trading — which held $78 million of the fund’s assets — but why the leadership had done nothing to help investigators looking into the matter.

Deutsch said he had been in discussions about leaving the county pension fund for several weeks. “It wasn’t a good fit,” he said after a meeting of the Board of Retirement of the San Diego County Employees Retirement Association, or SDCERA, Thursday. “There was a personality disconnect in the sense that the board is more hands on than I’m really used to.”

He also said there was a “philosophical difference” over the “alpha engine” — the fund’s money-losing hedge fund portfolio — which Deutsch has advocated and enhanced since he arrived at SDCERA nearly four years ago.

Deutsch’s resignation comes one week after the San Diego County Employees Retirement Association disclosed it had $78 million invested in WG Trading, a hedge fund whose operators have been charged with fraud.

Stephen Walsh and Paul Greenwood of WG Trading were arrested Feb. 25 on charges they misappropriated $535 million of retirement plan and endowment money. Federal investigators say the pair spent more than $160 million on items like rare books, horses, and an $80,000 teddy bear.

Pension board member Doug Rose, a San Diego County prosecutor, sharply criticized SDCERA Chief Executive Brian White for failing to contact federal investigators when the fund learned of problems at WG Trading before the arrests.

Rose said SDCERA was keeping a lid on information that might useful to prosecutors. “I’m baffled as to why we’re not reaching out and affirmatively offering our hand to the SEC,” he said.

Rose said that he had called White Feb. 13 after an industry regulator suspended Walsh and Greenwood. Rose said he urged White to contact New York Attorney General Andrew Cuomo’s office.

After consulting the pension’s attorney, Regina Petty, White decided not to do so. “We did not believe that our investment was in jeopardy by not taking further action at that point,” he said.

Petty said that SDCERA would always cooperate with investigators if it received a subpoena, but noted that there were “negative considerations” to volunteering information. One problem was “resource allocation” — namely, that while staff served as witnesses, duties would be neglected.

The pension terminated its relationship with WG Trading on Dec. 31 after the hedge fund refused to cooperate with an SDCERA consultant. Under its agreement with WG Trading, SDCERA is not entitled to receive its money until June 30.

Such restrictions on hedge fund redemptions, known as gates, have caught many investors by surprise, including SDCERA. Board member Dianne Jacob, chair of the County Board of Supervisors, requested a review of all similar restrictions SDCERA might face with other investments.

Jacob recently warned of the need to either reform pension benefits or pour hundreds of millions of taxpayer dollars into the fund just to keep its assets in reach of growing liabilities.

The pension board voted in December to reduce the alpha engine from 20 percent to 14 percent of total assets, saying hedge funds had become too risky. Today, SDCERA has between $600 million and $650 million in its alpha engine down from $1.3 billion as of June 30.

“It seems to me that 14 percent may still be a fairly excessive number when invested in hedge funds,” said board member Dan McCallister, the county’s treasurer-tax collector.

WG Trading is the second hedge fund disaster for SDCERA in less than three years. The pension also had $175 million invested in Amaranth Advisors LLC, a hedge fund that lost billions in 2006 speculating on natural gas futures. The pension has recovered only $80 million of that. Even before the news arose about WG Trading, the system was in the process of hiring a chief risk officer who would report to the board of retirement.

Deutsch’s investing philosophy was inspired by his contact with a WG Trading company — Westridge Capital Management — that managed money for Deutsch’s previous employer, Kern County’s pension fund. SDCERA began investing in WG Trading shortly after Deutsch started work in San Diego.

The fund reported overall losses in January of $183 million. Since June 30, SDCERA has been seen the value of its investment portfolio decline at a rate of more than $8,600 per minute.

Seth Hettena is a San Diego-based freelance journalist and author. Please contact him at seth@sethhettena.com with your thoughts, ideas, personal stories or tips. Or set the tone of the debate with a letter to the editor.

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