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— Playing with hedge funds and derivatives is a wicked game not suitable for pension funds. "If wealthy individuals want to roll the dice, it's up to them," says former San Diegan Gary Aguirre, who was investigating a hedge fund for the Securities and Exchange Commission when he got fired for taking his job too seriously. "But university endowment funds and pension funds? Their role is not to play Las Vegas."

The county pension system has money in 11 hedge funds. D.E. Shaw, run by a former computer professor, specializes in quantitative strategies. It got in trouble in 1998 after the Russian default but seems to have righted the ship. Silver Point Capital specializes in high-risk lending. Berens Capital Management is a fund made up of other funds focusing on emerging markets. Rancho Santa Fe's Freeman Associates goes both long (betting stocks go up) and short (betting they go down). In its last annual report, the county pension fund made little mention of risk, noting obliquely that there might be a "possibility that future changes in market prices may make such financial instruments less valuable." White says the 2006 report "will be changed."

Pat Shea, who was a primary lawyer in the Orange County bankruptcy and ran unsuccessfully for San Diego mayor, says that in the public sector, "We have created an incentive for risky investments. The public is required to backfill all the money lost. If I bet on a risky investment and it comes in a winner, I pull out the money (above the target 8.25 percent) and spend it on other stuff. But if I bet and lose my shirt, I turn the bill over to taxpayers, who have to put the money back.

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