Illinois State Board of Investment fires hedge fund managers – Finance News

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20 July 2017 | 6:14 pm

The Illinois State Board of Investment, one of the state’s biggest pension funds, soon will have jettisoned all but its best performing hedge funds because of low returns and high fees.

Over the past 18 months the pension fund has fired 65 hedge fund managers, and it will cut some of the remaining 17 as well, leaving it with just the best-performing funds that are reclassified by their strategies, such as stock investing.

“Hedge funds have not generated returns justifying the fees,” said ISBI Board Chairman Marc Levine, who has overseen the near elimination of $1 billion invested by ISBI in hedge funds.

ISBI paid out $180 million in fees to hedge funds over the past three years for performance, before those fees, that was worse than a balanced index fund, said Levine. He was appointed to his post in 2015 after the election of Republican Gov. Bruce Rauner.


In the past few years, some major pension funds, including Calpers, have exited their investments in hedge funds because of lackluster returns. Hedge funds are part of the alternative investments class that have often been criticized not only for their high fees, but also their opaque disclosures to clients.

ISBI also said it’s decreasing its allocations to another alternative investment class, private-equity funds, to 7 percent, from 9 percent. The pension fund has about $16 billion in assets under management and most of that money is deployed in more traditional stock and bond funds.

Nonetheless, ISBI is increasing its allocation to another type of alternative investment strategy called credit funds that are lending to companies and consumers in ways that the banks no longer do, Levine said. While these credit managers also charge management fees, Levine said ISBI rules allowing payouts to the managers only when they hit targets and provisions requiring a fairer split with clients will better protect pension returns.

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