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CalPERS probes oversight of two outside hedge fund advisors

The firms were working without required contracts. The official who oversees the pension fund's $5.8-billion hedge fund portfolio reportedly was disciplined.

November 25, 2009|By Evan Halper and Marc Lifsher

Reporting from Sacramento — California's huge public employee pension fund, under scrutiny after suffering billions of dollars in investment losses, is now investigating its own oversight of hedge fund deals.

As part of the inquiry, California Public Employees' Retirement System officials found that $36 million was paid to two hedge fund advisors who had been working without contracts. The official who oversees the $5.8-billion hedge fund portfolio was temporarily placed on leave and fined, according to people briefed on the matter.

A CalPERS spokesman declined to discuss the disciplinary action but acknowledged that CalPERS was investigating its dealings with two outside advisors, hedge fund management firm Paamco and a unit of Swiss banking giant UBS.

Both firms have been working with CalPERS since 2003, but their contracts lapsed two years ago. CalPERS continued to do millions of dollars of business with them regardless, which financial experts say exposed the system to legal and financial risk.

"We recently discovered that certain CalPERS controls and procedures were not followed in the last two years," fund spokesman Brad Pacheco said in a statement. "We have taken immediate steps to correct the issues and are working to strengthen our procedures to ensure that all policies are followed correctly and proper controls are in place.

"While we can't talk about specific personnel, we are reviewing the actions taken by our staff," he said.

The disclosure is the latest in a series of incidents tarnishing the reputation of CalPERS, the nation's largest public employees' retirement plan with an investment portfolio of $200 billion. The fund's once-sterling reputation has been rocked by huge investment losses and by revelations of rich fees earned by middlemen who help Wall Street firms win investment capital from CalPERS.

The official placed on leave was Kurt Silberstein, who oversees the CalPERS hedge fund program in his job as senior portfolio manager for global equity, according to people briefed by CalPERS who were not authorized to speak publicly and spoke on the condition they not be named.

These people said that Silberstein was forced to forfeit 10% of his $222,249 annual salary for six months and was placed briefly on administrative leave while the matter was investigated.

Silberstein declined to confirm or deny those accounts. "You have to work through public affairs," he said.

A spokesman for UBS declined to comment on the latest CalPERS investigation. Executives at Irvine-based Paamco, which stands for Pacific Alternative Asset Management Co., did not return a message left with their office.

Experts say the breach is troubling.

"If you have no contract it is difficult to meet your obligation to monitor these outside advisors diligently," said Blaine Aikin, chief executive of Fiduciary 360, a company that advises institutional investors on management practices. "The contracts are meant to make sure the service providers are performing the functions they are hired to do faithfully. It is cause for concern. I would agree with those in CalPERS who decided to launch an investigation. Contracting properly is a fundamental fiduciary duty."

An online write-up of the organization's hedge fund program refers to Paamco and UBS as a key "set of eyes" the pension system relies on to monitor the hedge fund program. It says Silberstein's hedge fund team rigorously monitors every aspect of the program with "questions, scrutiny, examination and thoughtfulness."

The UBS and Paamco contracts are not the first overseen by Silberstein that have raised questions internally, e-mails obtained by The Times show.

In 2002, former CalPERS investment manager Jeff Baker sent an e-mail to a superior asserting that another outside advisory firm had improperly received an $11.7-million bonus even though it missed its earnings targets.

Baker put the blame on contract language negotiated by Silberstein. CalPERS officials, however, said they investigated the claim and found that the contract was appropriate and Silberstein had not acted improperly.

The outside investment firm, Oak Associates of Akron, Ohio, was dropped soon afterward. Baker, who has since left CalPERS, declined to comment.

For years, CalPERS has been known as a progressive fund that bet heavily in real estate and other high-risk investments to boost returns for its members, at the same time pressuring large corporations to rein in outsize salaries for top executives.

But investment losses have hit the fund hard. CalPERS' portfolio sank 23.5% in the last fiscal year, while the average large pension fund dropped 18.8%. It lost nearly $1 billion after betting in 2007 on the mammoth Newhall Ranch housing development north of Los Angeles.

The fund is also under a spotlight after recent disclosures of the rich fees earned by so-called placement agents, who lobby pension funds on behalf of big money managers.

One well-known middleman, former Los Angeles Deputy Mayor Alfred J.R. Villalobos, has raked in at least $70 million in fees over the last decade from investment firms eager to pitch their services to the fund.

evan.halper@latimes.com

marc.lifsher@latimes.com

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