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The Alaska Permanent Fund will step into the recession-battered market to buy bonds issued by troubled companies, hoping to turn a profit when business improves.

The $30.7 billion fund's Board of Trustees met by teleconference Monday for a lengthy debate about that and other investments.

The board recently decided to abandon its long-held model for allocating its investments among stocks, bonds, real estate and other investments, and instead will base its allocation decisions on different types of risks, such as exposure to companies or to interest rates.

That changes was not communicated to legislators before the board adopted them in May, and took many by surprise, said Sen. Kevin Meyer, R-Anchorage, chairman of the Legislative Budget and Audit Committee.

"It may be fine, it may be legit, but we were totally caught off guard and nobody knows anything about it," Meyer said.

Fund Executive Director Mike Burns has been asked to appear before the committee in August to explain the new system.

The new asset allocation system figured prominently in a long and sometimes contentious discussion among the trustees Monday.

A proposal by permanent fund Chief Investment Officer Jeff Scott to move money into a hedge fund investment raised concerns from some board members.

Trustee Nancy Blunck of Anchorage said she was worried the staff was moving too quickly into new investments, without keeping the board and public in the loop.

"This is public money," she said. "It is not corporate money, it's not private money."

Trustee Pat Galvin, who also serves as the Commissioner of the Department of Revenue, expressed some concern with how the process was being handled.

"It seems to me like we are being slow-walked down a path with these incremental decisions," he said.

The board, he said, just needs to be assured it is going to end up where it wants the permanent fund to be.

At one point Scott appeared to bristle at Blunck's questioning of the hedge fund investment, saying "if I can't do anything, I need to know."

Board chair Steve Frank of Fairbanks told Scott and Burns that the board was dealing with major issues in adopting and implementing the new asset allocation policy, and that it would take time.

"Come on guys, you've got to give a little time the process, it's not going to hold up everything," he said.

Galvin said the board might want to in the future reconsider how involved it wants to be in investing in hedge funds, but did not block the staff proposal.

The board did explicitly approve an investment of $250 million in the Oaktree Capital Management Opportunities Fund VIII, which is expected to buy bonds issued by troubled companies.

Those bonds can be purchased at a discount now, less than they're likely to be worth when the economy and the companies that issued them strengthen, Scott said.

It is an investment that's less risky that buying stocks, he said, because even if the companies go bankrupt the bond holders will get something, while the stock holders may get nothing.

"We hope to produce superior risk-adjusted returns compared to the equity markets," he said.

The permanent fund's new asset allocation model includes 21 percent allocation to "special opportunities" that would include such investments.

Meyer said the Legislature wants to know more about the new asset allocation model.

"It may be great - it may be the best thing ever - but we just don't know a thing about it," he said.

• Contact reporter Pat Forgey at 523-2250 or patrick.forgey@juneauempire.com.