When David Deutsch encountered Westridge Capital Management in the mid-1990s, he was the executive director of a public pension fund in California’s central valley, home to avocados, oil rigs and Edwards Air Force Base. Westridge, founded by a couple of options market makers, was participating in a guaranteed investment contract fund in which Deutsch’s Kern County Employees’ Retirement Association had invested a chunk of its then-$1 billion in pension funds. In an aggressive marketing ploy, Santa Barbara–based Westridge approached the Bakersfield-based pension fund to suggest that it would do a lot better investing with Westridge directly rather than through the GIC.

The proposition was audacious. And yet to Deutsch, Westridge really seemed to have deciphered the Rosetta stone of investing. Its miracle product for ensuring good returns that were also rock steady and virtually risk-free went by a number of names but...