Stan Rupnik, CIO of the Teachers’ Retirement System of Illinois, sat down with Chief Investment Officer magazine for an extended interview this week.
He talks about how he increased the fund’s exposure to hedge funds and how he reacted to CalPERS’ high-profile decision to pull out of hedge funds.
Rupnik on how he increased TRS’ exposure to hedge funds after he took the CIO job in 2003:
When Rupnik arrived in 2003, he inherited control of a portfolio with no hedge fund exposure. After gaining board approval in 2006, he started with funds-of-funds. Later, after the hiring of Musick, direct investments commenced (one pities the poor funds-of-funds).
“It was the right way to start the program,” Rupnik now says. Likening it to co-investments in private equity, he comments that “with the first of anything, you feel an extra level of pressure.”
When you only have a few investments, Musick adds, it’s naturally not as diversified as it will end up, leaving the program’s future vulnerable to any upset. With a diversified hedge fund portfolio, he says, you can lose money in one or two funds and still have a phenomenal overall portfolio. Funds-of-funds solved this—for a time.
Letting go of the middlemen required “professionals on staff,” Rupnik says. Once they were in place, Illinois “could flip the model and go direct. You’re still always nervous when you change models and have one or two hedge funds in the direct portfolio—”
“—but don’t view it as sticking your neck out when you’re really behind it,” Musick adds.
“Agreed, entirely agreed,” Rupnik responds.
Rupnik on how TRS reacted, from an investment standpoint, to CalPERS’ hedge fund pullout:
No discussion of direct public plan hedge fund investing would be complete without mentioning the headwinds: namely, the California Public Employees’ Retirement System (CalPERS). In September 2014, the fund announced that it was abandoning its Absolute Return Strategies portfolio. “Our analysis, after very careful review, was that mainly because of the complexity of the hedge fund portfolio and the cost, we weren’t comfortable scaling the program to a much greater size than it currently held,” explained newly appointed CIO Ted Eliopoulos. The reaction was swift: Hedge funds rushed to the defense, some public plan trustees hurried to follow suit, and CIOs everywhere—who know the symbolic value of CalPERS’ move—cringed.
But for Illinois Teachers’—a rose in a bed of weeds, given the state’s general public plan funding situation—the reaction was carefully judicious. “My worry isn’t so much investments or the plan or the team. What I worry about is some external force that causes some skittishness,” Rupnik says. This worry, both he and Musick assert, is decidedly present.
“I’m terrified every day,” the latter says. “I think it’s what makes us good at what we do. We’re just estimating things at the end of the day. We blend our estimates, monitor them as best we can, and structure investments to protect us as best as we can. As far as the cold sweats—I’m just super freaked out about anything. No one thing keeps me up at night.”
Read the full interview here.