Split opinion

When public pension boards consider new asset classes, it's usually because the investment staff has nudged trustees, who often have less-than-expert knowledge of finance. In Oregon, lately, it's been another story. The six-person Oregon Investment Council, which oversees the state's $58.2 billion Public Employees Retirement Fund, is dominated by investment pros. Since last summer they have been prodding a reluctant staff to consider investing in hedge funds and have asked for a formal recommendation on January 31.

"We need to be asking ourselves if hedge funds are appropriate for our portfolio," says Portland accountant Richard Solomon, who chairs the OIC.

Ronald Schmitz, director of the Oregon State Treasury's investment division and de facto chief investment officer of the fund, is skeptical, even though he welcomes the review. "We could well be directed to invest in hedge funds, in which case I'll have to grit my teeth and do so," says Schmitz, who dislikes the high fees and lack of transparency.

His views are hardly unique. In 2005 only about one in five pension plans were invested in hedge funds. In contrast, 66 percent of endowments had money in these funds, according to Connecticut research firm Greenwich Associates.

Schmitz says that recruiting topflight hedge fund talent would be difficult and that consultant fees would be high. Most important, he argues that Oregon doesn't need the extra diversification that a small hedge fund allocation would provide. He already has more exposure to alternatives than most of his peers: At the end of November, 9.8 percent of Schmitz's fund was invested in private equity and 6.5 percent in real estate, compared with an average allocation among state retirement systems of 3.8 percent in private equity and 4.5 percent in real estate, according to the National Association of State Retirement Administrators.

This exposure has helped Oregon post strong results. For the 12 months ended September 31, the fund returned 12.99 percent versus the 10.61 percent median return for public funds with more than $1 billion, according to Wilshire Associates. Over the past five years, the fund returned 10.82 percent, compared with the 9.20 percent median.

"They don't need more diversification for return enhancement," says Michael Beasley, co-founder of the fund's general consultant, San Francisco's Strategic Investment Solutions, which is preparing the formal recommendation along with Schmitz' staff.

Even if that report advises against investing in hedge funds -- as is likely -- trustees will have the final say. A basis for compromise is already in place. In December the OIC authorized the staff to allocate capital to managers Oregon invests with that offer 130/30 long-short equity portfolios. These include Boston-based Acadian Asset Management, New York-based Goldman Sachs Asset Management and AQR Capital Management in Greenwich, Connecticut. By using leverage to invest 130 percent long and 30 percent short, the strategy can deliver enhanced returns with greater transparency and lower fees than hedge funds. By giving in a little, both sides might gain.