Conflicted Advice in San Francisco
The San Francisco Employees’ Retirement System is preparing to vote on a proposal to invest a portion of the pension’s assets in hedge funds. Last month the trustees deferred the decision after receiving detailed reports from its Chief Investment Officer and outside consultant. According to reporting by David Sirota of the International Business Times, the trustees are preparing to vote on the proposal later this week.
Mr. Sirota notes that San Franciso’s consultant, Angeles Investment Advisors, also manages a hedge fund-of-fund. Mr. Sirota asked an executive at Angeles about the conflict of interest between its advisory business and fund-of-fund business. Michael Rosen of Angeles rejected the idea that there is any conflict, because “the hedge fund run by Angeles executives does not collect hedge fund management fees from the firm’s consulting clients.”
Angeles is attempting to skirt the conflict of interest by not charging their clients a management fee if they invest in the fund-of-funds. However, that hardly settles the matter. Imagine if you are a non-consulting investor in Angeles’ fund-of-fund and get charged a 0.50% or 0.75% management fee. Meanwhile, consulting clients aren’t charged a fee. As a result, the non-consulting clients are bearing all the expenses of running the fund-of-fund. In solving the conflict with its consulting clients, Angeles has simply created another conflict.
However, even if San Francisco never utilizes Angeles’ fund-of-fund, there’s still a big problem. Angeles can’t possibly give San Francisco objective advice about whether or not the pension should invest in hedge funds. Clearly, Angeles thinks there is value in hedge fund investments. Otherwise, they wouldn’t have created the fund-of-fund product. Angeles reports and presentations may be filled with all sorts of arguments for and against hedge funds, but in the end they are compelled to tell San Francisco that allocating to hedge funds is a good idea. If they were to conclude otherwise, their fund-of-funds investors might begin to wonder why Angeles sold them the product. In deciding whether or not to invest in hedge funds, the San Francisco trustees need to look elsewhere if they are seeking an unbiased opinion.
Coda: In trying to understand Angeles Investment Advisors role as a consultant to San Francisco, I turned to the pension’s website and annual report. I’m not sure if I’ve seen a pension plan that discloses as little as San Francisco about its investments. While Angeles is listed as consultant in the annual report, San Francisco doesn’t disclose the fee paid to its consultant. It also doesn’t list the fees paid to or performance of its money managers. On its website, the only investment information is the pension’s asset allocation as of June 30, 2012. The lack of transparency doesn’t inspire confidence.