Hedge Funds County Once Championed Now Prove Too Risky

Voiceof San Diego – San Diego County’s pension fund is slashing its $1 billion hedge-fund portfolio and acknowledging that the investments it once championed have become too risky and no longer make sense.

The board of the San Diego County Employees Retirement Association voted unanimously Thursday to reduce the size of its hedge-fund portfolio by more than half. That will free up $600 million, half of which will be held as cash. The rest will be reinvested in the portfolio.

The pension board also agreed to curb the aggressive strategy the $7.5 billion fund used to finance its hedge fund investments. Under the "alpha engine" strategy, the county bought financial derivatives known as swaps that were essentially bets on the market. Much like bets on a Chargers game, the swaps cost nothing initially, which freed up cash for hedge fund investments. When the market rose, the swaps made money, but in recent months, they cost the pension fund millions of dollars. Last month, the board voted to free up $100 million in cash to protect against further declines.

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