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Art Institute Paints a Smaller Picture for Hedge Funds in Investment Landscape

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CHICAGO (–The board of trustees at the Art Institute of Chicago is ready to put the poor investments of the past behind it but will keep hedge funds as part of a newly restructured asset allocation for its endowment fund.

The endowment became the poster child for improved investor due diligence and transparency after it lost most of a US$22.5 investment in a single hedge fund investment in 2001.

As a result of its encounter with the alleged fraud in that investment committed by Conrad Seghers and James Dickey, founders of Integral Investment Management LP, Dallas, the Art Institute had cashed out of all of its hedge fund investments by September 2001. A consulting firm, Cambridge Associates LLC, Boston, has now picked new managers for the endowment’s new hedge fund allocation, according to Art Institute officials.

The museum’s trustees restructured the endowment’s US$579 million fund, moving to a diversified portfolio with multiple managers. Now, instead of an allocation to hedge funds that in the past was as high as 87%, trustees have a target allocation of only 10% to hedge funds. Other investments include 6% inflation hedges, 5% non-marketable alternatives, 6.5% opportunistic investments, 25% fixed income, 32.5% U.S. equity and 15% international equity.

As of the end of June, the endowment had 10.2% of its assets in hedge funds, which worked out to about US$59 million. For its 2004 fiscal year, which ended June 30, the Art Institute posted a gain of 17.8%, which exceeded its benchmarks. Trustees chose to hire additional internal staff to monitor investments and Cambridge Associates LLC was retained as an investment consultant.

Earlier this year Integral, the Dallas-based fund that was a key hedge fund investment for the museum, received a Securities and Exchange Commission civil complaint alleging fraud in its three funds: Integral Equity LP, Integral Hedging LP and Integral Arbitrage LP (see ).

Two years after filing subpoenas and investigating the firm, the SEC seems to be finally moving forward with its case, as the Art Institute picks up the pieces from its investment losses and deflated confidence in hedge fund strategies.

Officials say that the Art Institute is now on its way to a balanced operating budget, and rating agency Moody’s Investors Service, New York, has assigned a long-term A-1 rating to the Art Institute.

“This is a positive affirmation that the changes in financial management and oversight initiated by trustees three years ago have put our investments and budget on the right track,” said James Cuno, the Art Institute’s director and president, in a statement.

The Art Institute’s case against Integral and its founders is still in litigation.

Contact Bob Keane with questions or comments at: [email protected].