The annual report, or 10-K, that General Motors just filed with the Securities and Exchange Commission catalogs every petrifying financial risk known to man. But deep in the report is a shining statistic: In 2005, GM's pension fund earned 13%. For a simplistic comparison, take the S&P 500, which had a total return for the year of only 4.9%.

We aren't talking chump change here. This is the largest corporate pension fund in the U.S., with assets exceeding $90 billion at the end of 2005. So the fund's dollar return last year was a huge $10.9 billion. Care to match that against GM (Research)'s bottom line for the year? The figure was eerily similar, $10.6 billion, except that was a net loss - deep, dark-red ink.

Keep in mind that the subject is GM's pension fund and not the company's mind-frazzling health obligations, which are entirely separate. Thanks partly to that 13% return in 2005, the U.S. pension plans ended the year overfunded (according to Generally Accepted Accounting Principles) by $6 billion, meaning that assets exceeded liabilities by that amount. The company's U.S. healthcare plans, by contrast, were underfunded by a staggering $61 billion.

To comprehend what's happened at the pension fund, go back to 2003. Up until then, the folks at GM Asset Management (GMAM) had run the fund adventurously - moving early on, for example, into "alternative investments" like hedge funds - but had nonetheless mainly invested in the usual suspects: U.S. large-cap equities and high-grade bonds.

Then, after the bubble burst in 2000, the fund - like many another investor - suffered two losing years. It nonetheless owed pensioners more than $6 billion a year, so the plans ended 2002 underfunded by a colossal $19 billion. By federal rules, that meant the company would have to contribute many billions to its fund in the upcoming years.

So in 2003, GM decided to push the envelope with a two-part plan. The company first borrowed $18 billion and next opened a sort of high-powered margin account by putting $14 billion of that into the pension fund. Second, GMAM, then run by Allen Reed, adopted a radical new investment philosophy.

Trying, so Reed said, to escape "volatility" - which was code for saying he wanted to reduce the probability of loss - the fund steered the new money away from conventional investments toward those that Reed hoped would provide what investment managers call "alpha." This is the term for excess returns born out of a manager's skill and, typically, by his positioning himself in corners of the market that are supposedly less efficient than the general market.

So GM's big chunk of new money was dedicated straight-out to hedge funds and other alpha-chasing vehicles, such as emerging-market securities, private-equity firms, junkbond portfolios, and derivatives.

Reed argued that the strategy reduced risk because it diversified the fund into investments he posited would produce returns uncorrelated with the performance of the general market. But to other people the strategy looked, and still looks, over the edge.

Says Jeremy Gold, a prominent New York actuary: "GM was smart in borrowing the money to fund the plan. That's tax efficient. Its timing was extraordinarily good too, because interest rates were low and we now know that the stock market was ready to head up. But to put that money into opaque, risky assets - that I think was dangerous."

He may turn out to be right: The pension fund's history with this strategy is short. But for now, GMAM has bragging rights, not only because of that 13% return last year but also for a strong 14% gain in 2004.

Meanwhile, there's other news on this front. In one item, Reed, 59, has retired and been replaced by Nancy Everett, 51, who came from the Virginia Retirement System, which has a reputation for pushing the envelope itself. Another item concerns GM subsidiary General Motors Acceptance Corp., just over half of which is slated to be bought by a group led by hedge fund Cerberus. The irony here is that the GM pension fund, in one of its tentacled investments in hedge funds, has a stake in Cerberus. That's selling your cake and having it too.

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