Illinois State Universities Retirement System’s investment committee agreed to consider hedge funds of funds and other absolute-return strategies in developing asset allocation proposals for an asset/liability study now under way.
The move to absolute return and hedge funds would be the first for the Champaign-based system, which oversees $14.4 billion in defined benefit assets.
The committee on April 22 accepted investment consultant Callan Associates’ recommendation, which called for using of hedge funds of funds rather than direct hedge funds, for a potential allocation, as well as considering individual unconstrained multiasset managers of absolute-return strategies. The size of the absolute-return allocation was not discussed.
Callan plans to present asset allocation proposals, including absolute-return targets, at the system’s investment committee meeting on June 9. The SURS board could make a decision June 10.
“We have to look at it with an open mind,” Daniel L. Allen, chief investment officer, said at the investment committee meeting.
The asset allocation study would also consider reducing U.S. equities and increasing non-U.S. equities and an as-yet-undetermined area of fixed income. Only small changes would be made to real estate and private equity; keeping a 5% TIPS target and a 1% target to infrastructure; and eliminating a 1% commodities target. SURS adopted the commodities allocation three years ago and has never implemented it because of concern about volatility, Mr. Allen said.
The system’s actual allocation as of March 31 was 32.4% U.S. equities, 20.9% fixed income, 17.7% non-U.S. equities, 10.2% global equities, 7.8% private equity, 6.3% real estate, 3.6% TIPS and the remainder in an opportunity fund — an area for testing new investments in different asset classes, according to a SURS report.
Any searches and other manager restructurings for implementing a new asset allocation could be considered at SURS’ Sept. 15 and Dec. 8 committee meetings.
Callan recommended absolute-return strategies because of their expectation of producing a positive return in all investment environments, Ryan Ball, Callan vice president, said at the meeting. The allocation would be for diversification rather than as a return enhancer, he added.
Callan prefers hedge funds of funds because of the additional fiduciary oversight the structure provides over direct hedge funds, Mr. Ball said.