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San Jose Pensions to Enlist Hedge Funds With $730 Million

Two pension plans in San Jose, California, are poised to make their initial foray into investing in hedge funds by deploying $730 million to improve returns.

The City of San Jose’s Police and Fire Department Retirement Plan and the Federated City Employees’ Retirement System seek to invest in 15 to 20 hedge funds in the next six to 12 months, according to Sean Bill, a trustee on the police and fire system’s board. The pension funds’ investment committees hold joint meetings each month and coordinate their activities where possible, he said in a telephone interview.

The pension funds will first search for multistrategy funds, according to Bill. San Jose staff and the pensions’ consultant, London-based Albourne Partners Ltd., have met with 35 managers and may recommend initial investments as early as October, he said. They will eventually seek to add relative value, event-driven, long-short equity and macro funds.

“One of the challenges that the pension world is facing is lower projected future returns across asset classes,” Bill said. “We are looking for managers that offer superior risk-adjusted returns that are not highly correlated with our core equity and fixed-income holdings.”

Event-driven funds seek to capitalize on special situations such as corporate takeovers, long-short managers bet on and against stocks and macro strategists try to profit from macroeconomic trends. Multistrategy funds can employ these and other approaches.

Minimizing Risk

The initial allocation to each manager selected is expected to be about $50 million, Bill said.

The pension plans seek to create a diversified, global portfolio, he said. They are looking for managers that are uncorrelated to traditional market indexes and that will provide low portfolio risk to minimize losses in falling markets.

The pensions are targeting a return of Libor plus 5 percentage points for the absolute-return portfolios, with annualized volatility of 4 percent to 11 percent.

The Police and Fire Department plan has $2.8 billion in assets and is 80 percent funded, Bill said. Federated City Employees has $1.8 billion and is 69 percent funded. The plans cover a combined 10,600 active and retired workers and survivors.

Bill was appointed to the Police and Fire Department’s board in December 2010.

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