Illinois College Savings Plan To Cut Hedge, Private Equity Funds

Jun 25 2012 | 1:31pm ET

Illinois' prepaid college tuition savings plan is scaling back its effort to catch up from a massive shortfall—an effort that relied heavily on hedge funds.

The Illinois Student Assistance Commission is expected to vote today to slash the College Illinois program's alternative investments exposure by almost half. The move isn't unexpected: ISAC ousted its chief investment officer, Andrew Davis, a year ago after a Crain's Chicago Business report revealed that the College program's assets had been shifted heavily into hedge funds, private equity and real-estate investments.

Indeed, trying to make up for a 30% funding shortfall, ISAC had poured 47% of the $1 billion College fund into alternatives. Under new CIO Kent Custer's plan, that total will fall to 27%.

Among the casualties of the new plan, and of Davis' exit, is a small Chicago hedge fund run by Davis' friend, Joseph Reynoso. ISAC plans to yank half of its $20 million investment in Reynoso's fund. The $20 million represents half of Reynoso's total assets.

"It's a smaller fund," Custer said of Reynoso's fund. "You don't want to represent [most of] the assets of any fund."

Callan Associates assisted in the ISAC plan with an asset-allocation study. Much of the hedge fund cut will benefit the College fund's stock portfolio, which will rise from 23% to 48%.

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