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Illinois State Board drops hedge funds as separate portfolio

Trustees of the Illinois State Board of Investment, Chicago, adopted a new asset allocation for the $17.2 billion fund that eliminates hedge funds as an asset class.

ISBI "plans to retain several high-performing managers … (that) were previously classified as hedge funds but now will be allocated to the asset class they invest in," said a news release about the board's meeting Wednesday.

"We are going to hold managers accountable to appropriate benchmarks. A hedge fund manager in the equity space will be measured against equity benchmarks," said Marc Levine, chairman of the board of trustees, in the release.

Donya Mansoubi, an ISBI spokeswoman, said in an email that Rock Creek Group will select the managers that will be retained.

ISBI began reducing its hedge fund exposure about 18 months ago, beginning with the termination in March 2016 of three hedge funds-of-funds managers running a total of $989 million.

Management of those assets was delegated to the remaining hedge funds-of-funds manager, Rock Creek Group, which managed $677 million at the time. The hedge fund target was lowered to 3% from 10%, and Rock Creek was tasked with reducing the approximately $1.7 billion portfolio to about $500 million to meet that target.

The ISBI board made other changes to the fund's overall asset allocation at its July meeting.

The system's broad equity asset class target was reduced to 51% from 52%, with a decrease to 7% from 9% for private equity and a 1 -percentage point increase in emerging markets equity to 8%. Unchanged were U.S. equity, 23%, and developed foreign equity, 13%.

The allocation to the rate-sensitive category rose 3 percentage points to 22%, with the target to intermediate bonds rising to 14% from 11%, long-term government bonds rose to 4% from 3% and TIPS dropped 1 percentage point to 4%.

The overall credit allocation rose 4 percentage points to 15% with opportunistic credit doubling to 8%. The high-yield bonds/bank loans 5% target was unchanged as was the 2% target for emerging market debt.

The real-assets bucket fell to 12% from 15% with a 3-percentage-point decrease in infrastructure to 2%; a 1 point decrease in the core real estate weighting to 5.5% and an increase in non-core real estate to 4.5% from 3.5%.

Separately, ISBI trustees adopted Glass-Lewis proxy-voting guidelines "in line with U.S. Department of Labor guidance," said Christopher Brannan, the fund's general counsel and chief compliance officer, in the release. "ISBI is focused on voting its shares for the sole benefit of its participants and beneficiaries," he said.

The fund previously followed Taft-Hartley proxy-voting guidelines.