The Teachers' Retirement System of the State of Illinois, Springfield, is drastically restructuring its $2 billion hedge fund portfolio in a move to all direct investments within the next two to three years.
The changes are the brainchild of Kenneth Musick, absolute-return investment officer, who joined the $39.6 billion fund in October and wasted little time in reconstructing the hedge fund program.
More staff will be needed, Mr. Musick told trustees at May 22-23 investment committee meeting. He didn't provide any details.
First on the tap are searches for a hedge fund consultant and a hedge fund risk management provider.
The searches likely will be posted on the pension fund's website (http://trs.illinois.gov) within two weeks, R. Stanley Rupnik, chief investment officer, said in an interview. Finalists likely will be interviewed at the board's Oct. 23-25 meeting.
The consultant will help staff select single- and multistrategy hedge funds for direct investment. And a risk management system is essential for providing investment performance, position-level transparency and other operational controls, Mr. Musick said.
One of the two hedge funds-of-funds managers — K2 Advisors LLC, which manages $520 million, and Grosvenor Capital Management LP, with $438 million — will be terminated. The remaining firm will assume management of the combined portfolio with a new assignment: Concentrate the hedge fund-of-funds lineup to 20 underlying hedge funds from 60 funds.
Both funds-of-funds managers have been asked to rebid, and the surviving manager is likely to be chosen at the board's Aug. 14-16 meeting, Mr. Musick said.
The pension fund will increase direct investments in hedge funds to 10 from five. Four to six new hedge fund managers will be presented to the board for approval over the next six months, Mr. Musick said.
TRS' current investments in single- and multistrategy hedge funds will be retained: Blue Mountain Capital Management LLC, $230 million; Bridgewater Associates LP, $304 million; Carlson Capital LP, $140 million; Claren Road Asset Management LLC, $214 million; and Pine River Capital Management LP, $189 million.
These changes will be slotted into a new portfolio construction that reorganizes the current 22 hedge fund strategy categories into three new ones: convergent, or differentiated strategies that have correlated performance during times of market stress; convex, or trading strategies that provide positive performance during market downturns; and opportunistic, or strategies that don't fit into either of the other two categories.
Illinois Teachers' trustees also made a wide range of investment decisions during their spring meeting. They preapproved UBS Securities, CP Cogent Securities and Park Hill Group as private equity and real estate secondary market advisers.