Illinois Teachers' Retirement System, Springfield, will directly invest at least $400 million with up to 12 hedge funds starting this fall, Kent Custer, senior investment officer, told trustees at the $33.1 billion system's board meeting on Aug. 5.
Manager selection assistance will be provided by the system's existing hedge fund-of-funds managers, K2 Advisors, which managed $519 million as of June 30, and Grosvenor Capital Management, which managed $360 million as of the same date. R.V. Kuhns & Associates, the fund's consultant, also will assist.
Mr. Custer said system staff will work with K2 and Grosvenor to create a shortlist of 15 to 20 hedge funds that will be subject to rigorous due diligence. He said he expects between two and four funds will be added annually over the next two to three years.
The first round of hedge fund hires likely will be in equity and credit strategies, Mr. Custer said.
There will not be an open search process for the direct investment allocation, said R. Stanley Rupnik, acting executive director and chief investment officer.
The system made its first direct investment in a hedge fund in 2008 with Bridgewater Associates' Pure Alpha hedge fund. The allocation totaled of $326 million as of June 30.
In May, trustees approved doubling the plan's hedge fund target to 5% of total assets, and the tactical plan approved Aug. 5 will help staff reach the target. The hedge fund portfolio now holds $1.2 billion, or 3.6% of total assets.
Mr. Custer confirmed that the three firms now managing portions of the hedge fund portfolio will be retained. But he noted that if the system makes a direct investment in a hedge fund also used by K2 or Grosvenor in the separate account hedge fund-of-funds portfolios, the fund-of-funds managers may be asked to select another manager.
Also at the meeting, trustees approved a tactical investment plan for the system's $3.2 billion real estate portfolio. The plan includes an increased focus in 2011 on core and specialty real estate subsectors, especially international real estate. System staff also will try to add more minority- and women-owned real estate managers as part of its emerging managers program.
In addition, additional allocations will be made to four existing real estate managers; $100 million each was given to Invesco Real Estate for a total investment of $362 million and to Cornerstone Real Estate Advisers, raising it to $432 million. Lincoln Property received $50 million, increasing its total investment to $312 million. KBS Realty Advisors was given an additional $73 million, to $372 million.
Separately, trustees ratified hirings Aberdeen Asset Management to run $357 million in active large-cap core international equities and Northern Trust to manage a $360 million MSCI World ex-Sudan index fund.
Fiduciary Management Associates and Lombardia Capital Partners, both active domestic small-cap value equity managers, were graduated out of the system's $500 million emerging manager program. Fiduciary Management Associates managed $44 million as of June 30 while Lombardia managed $39 million.
As “full” managers, FMA and Lombardia each will manage $180 million. Funding will come from rebalancing and from index funds.
