This week, officials in San Francisco may vote on a proposal that could shift billions of dollars of the city's pension portfolio from plain vanilla investments such as stocks and bonds into hedge funds that charge substantially higher management fees. As they mull that move, municipal pension overseers are drawing on the counsel of a company called Angeles Investment Advisors, one of a crop of consulting firms that has emerged across the country in recent years to aid municipalities in navigating the murky waters of managing money.

For two decades, Angeles has been employed by the San Francisco pension system to champion the best interests of city taxpayers and employees -- the cops, firefighters and other municipal workers who depend on pension payments after their retirement. But the firm is concurrently playing another role that complicates its image as a disinterested guide: An International Business Times review of U.S. Securities and Exchange Commission documents has found that since 2010, Angeles has run a hedge fund based in the Cayman Islands that invests in other hedge funds.

In other words, the consultants that are supposed to be providing unbiased advice about whether San Francisco would be wise to entrust its money to the hedge fund industry are themselves hedge fund players.

The SEC documents reviewed by IBTimes also show that Angeles reserves the right to reap additional fees from its consulting clients when those clients invest in hedge funds. Angeles has acknowledged that such fees “can create a potential conflict of interest.” One San Francisco official says the firm has not explicitly disclosed its hedge fund connections to the city's pension trustees. And Angeles has declined to disclose the specific investments within its hedge fund, leaving outsiders to guess whether the consultant has its own money in the same investments it may end up recommending for the city, should San Francisco officials approve a move into hedge funds.

Angeles’ principal and chief investment officer Michael Rosen told IBTimes that his firm's hedge fund in no way presents a conflict of interest with its advisory role to the San Francisco pension system. He said Angeles, whose clients collectively represent $45 billion of assets, does not stand to profit if those clients move into hedge funds.

Yet financial experts, other consultants and groups representing retirees say that Angeles executives' simultaneous roles as investment advisers and hedge fund operators pose precisely the sort of conflict of interest that has become all too common as Wall Street financial firms manage growing slices of public pension money.

"This creates a very real potential for a conflict of interest," said Tim Jenkinson, an Oxford University professor who studies consultants’ influence over pension management. "Is this consultant going to just advise the pension fund on what is best for beneficiaries, or is the consultant going to end up advising the pension in a way that would get the consultant remunerated as an asset manager?"

The dynamic at the San Francisco Employees’ Retirement System (SFERS) highlights the controversial role played by ostensibly objective consultants as they advise the public officials who manage trillions of dollars' worth of pension assets.

Only a few months ago, Rep. George Miller, a Bay Area Democrat, requested a federal investigation of what he called "significant and inappropriate conflicts" in the pension consulting industry. That followed a New York state investigation into such potential conflicts. Meanwhile, the SEC and Government Accountability Office found that many pension consultants failed to disclose their potential conflicts. The GAO also found that pension systems that employed consultants who did not disclose their potential conflicts have tended to deliver lower investment returns.

Debates about the integrity and independence of financial consultants have intensified as states and cities place more public money in the hands of private investment firms. A 2011 survey by Pensions and Investments magazine found 94 percent of institutional investors employ a consultant, with many investment officials telling the magazine that consultants are crucial to their decisions.

A Proposed $3 Billion Bet On Hedge Funds

This summer, San Francisco pension officials asked Angeles to analyze the hedge fund initiative by SFERS investment officer William Coaker. The city’s pension system is 92 percent funded and considered financially healthy, but Coaker is proposing a major change of strategy. His plan, which could be voted on this week, could shift up to 15 percent -- or $3 billion -- of the city's portfolio into hedge funds, at a potential cost of more than $100 million in additional annual fees paid to private hedge fund managers.

In response to trustees’ questions about Coaker's strategy, Angeles last month delivered a series of memos evaluating whether the pension system should invest in hedge funds. The memos noted some of the drawbacks of the proposed investments, such as higher fees. But the overall tone was enthusiastic, declaring that direct investments in hedge funds "will be advantageous" for the pension system because such funds "have provided far greater downside protection than [stocks] while capturing a fair amount of the upside."

Hedge funds "have generated higher risk-adjusted returns than broad equity markets with better downside characteristics," said one memo, which also stated that hedge fund returns have been "smoother and less subject to sharp drops than the S&P." Another memo said maintaining healthy pension funding levels "is more likely ... if lower volatility assets such as hedge funds are included” in SFERS’ portfolio.

In making the case for hedge fund investments, the Angeles memos took sides in what has become a heated and high-stakes debate about hedge funds and other so-called alternative investments.

The Angeles consultants placed themselves in opposition to Warren Buffett, who urged San Francisco trustees to avoid investing in hedge funds. The memos essentially contradicted an April study from the San Francisco Federal Reserve Bank, which said that “hedge funds may be the most important transmitters of shocks during crises.” And the memos largely ignored recent headlines about other public pension systems showing that while hedge funds may reduce year-to-year volatility, they often deliver below-market returns for investors over the long haul.

The memos failed to account for San Francisco's recent loss of more than $33 million on one of its previous transactions with a hedge fund -- a currency fund called FX Concepts. And the views expressed by Angeles didn’t square with the experience of the California Public Employee Retirement System (CalPERS), whose chief investment officer recently announced that the system was selling off its investments in hedge funds because of "their complexity, cost, and the lack of ability to scale."

Connections To The Hedge Fund Industry

In hiring an outside adviser, the San Francisco pension system has required general consultants to have "no conflicts of interest" and a commitment to "maintain independence from all interest(s) other than the interests of the Retirement System members and beneficiaries."

Yet since 2010 the principals of Angeles Investment Advisors have operated a hedge fund based in Grand Cayman -- one which counts as investors at least some non-profit and governmental entities and which has roughly $800 million worth of investments in its portfolio. In its SEC filings, the firm says it may have a proprietary interest or ownership stake in the investment products that it recommends to advisory clients. Other SEC filings note that "in certain cases" when its advisory clients invest in hedge funds, Angeles can charge an additional 0.5 percent fee -- an arrangement that could provide a financial incentive for the firm to recommend hedge funds.

Angeles principal Michael Rosen rejected the idea that the firm has any conflict in its dealings with San Francisco, because, he said, the hedge fund run by Angeles executives does not collect hedge fund management fees from the firm’s consulting clients.

"We make [the fund] available to [our clients] if that's something of interest to them, but there's no financial incentive from our standpoint; there's no management fee that we get from putting clients into that fund," he said. "There's the potential for a lot of conflict of interest that either needs to be discussed or disclosed, but from our standpoint, we've tried very hard to avoid those conflicts."

The research firm Diligence Review Corporation argued in a 2013 report that it is very difficult for consultants to provide objective advice to pension systems about investments if those consultants are actively involved in the investment business. That view was echoed by John Linder, an executive at Pension Consulting Alliance, which works with the California State Teachers Retirement System.

"It is near impossible for consultants to be unconflicted if they are also managing assets," Linder told IBTimes. Even if consultants are not recommending their own funds, Linder said, they could be getting favored terms and access for their funds in exchange for directing client investments to specific managers -- a practice that at the very least presents the appearance of a conflict of interest, if not an actual one.

Questions About Disclosure

Rosen declined an IBTimes request to identify the hedge funds in the firm’s so-called fund of funds, though he said Angeles’ employee profit-sharing plan is invested in that fund. The lack of disclosure could make it difficult for San Francisco officials to know if Angeles urges the city to invest in the same hedge funds in which the firm invests. Angeles says it does buy or sell securities that it recommends to advisory clients.

Angeles also declined an IBTimes request to release the text of the contract it signed with the city, and SFERS staffers and most trustees did not return IBTimes calls regarding any disclosures in the agreement. One trustee replied with a refusal to comment. And trustee Herb Meiberger, a San Francisco State University finance professor who has been elected to the city pension board since 1992, said his fellow trustees have not been provided any explicit disclosure about Angeles' hedge fund connections, even as the firm has guided the board's debate about hedge funds.

"I have no recollection of Angeles managing hedge funds disclosed or reflected in the minutes of any board meeting," said Meiberger, who opposes the hedge fund investment proposal. "I have no recollection of any written document or memo stating that Angeles manages hedge funds. They have not provided that."

When asked if Angeles told San Francisco officials about its relationship to hedge funds, firm executive Rosen said: "I don’t know. I think it’s pretty common knowledge that we have a fund of funds for the benefit of our clients. It’s certainly no state secret."

The Service Employees International Union Local 1021, which represents more than 12,000 public employees eligible for SFERS benefits, recently wrote to SFERS trustees, criticizing them for their "rush to judgment" in support of the hedge fund proposal. The letter from union president Roxanne Sanchez asked pension trustees to have the proposal evaluated by a consultant who has worked with other boards that have "examined similar proposals and rejected them."

"It is nauseating to hear that the people we are supposed to trust to advise our retirement board have serious conflicts of interest,” Sanchez told IBTimes. “Why would we let someone running their own hedge fund provide advice about our pension?”

"We repeat what we have been saying: Our members and retirees deserve a consultant we trust to have the integrity to provide independent advice," Sanchez said.

Angeles’ current contract with SFERS is up for renewal this year. At the same board meeting this week in which they may vote on hedge fund investments, San Francisco’s pension trustees are also expected to release a proposal for bids from general consultants.