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Retiring Hedge Funds: Pension Plan Investing Strategies


An estimated 140,000 state employees have their pensions invested through the Illinois State Board of Investment (ISBI). The pension fund is in charge of how some $22 billion are invested.

ISBI chairman, Marc Levine, has pushed through an overhaul of the fund’s investment strategy. He says $75 million a year is being saved by getting the board—one of the state’s biggest pension plans—out of hedge funds.   

Below, a Q&A with Levine.

Tell us what you discovered after being appointed by Rauner in 2015, and why you felt there needed to be some drastic changes.

ISBI wasn’t terribly rotten, but there was a lot of room for improvement, as there is in all state pension plans. Biggest problem was really that it was too complex. My philosophy is if you don’t understand what it is, you probably shouldn’t invest in it. Complicated hedge funds made up 10 percent of the portfolio. We are all volunteers, and many have no financial background. It could easily take days to properly vet money managers and their portfolios. We simply don’t have the time or expertise to do.

How did you change the ISBI’s investing strategy?

We terminated more than 100 money managers. There were just too many. We couldn’t keep track of them all. We started transitioning our holdings into what we call passive investments or index investing. That’s the simplest way to invest because you just follow the indexes of Standard & Poor’s and other investment firms. You just put your money there, don’t need to put any real thought into it, and on top of that, there are no real fees. Indexing is essentially free, just clerical costs.

We’ve saved $75 million per year in money manager fees. Truth be told, hedge funds don’t do any better than the indexed funds which we can get for free. Why should we pay these hedge fund managers who often get outrageous fees? Fees can be 2 percent of your assets or 20 percent of all the profits! It just seemed like it was a foolish way to invest. Standard & Poor’s did a study last year showing that 94 percent of stock pickers/money managers did not beat the returns of the stock market’s general index funds. Transitioning to indexes has taken out a lot of cost and a lot of the complexity. In my view, this is the best way for any individual to invest. Every investor can do exactly what we’ve done.

Did you keep any of the money managers? How did you decide which to keep?

We kept five or six of the stock pickers/money managers. People who over long periods of time have beaten the pants off the stock market. Usually they have a very specific area of expertise, say health care stocks. 

Are most of the trustees financial managers like yourself?

No, they don’t have to have investment experience. Often it’s made up of a lot of union representatives, like on the Teachers Retirement Board, where there are a number of teachers.


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