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The Alaska Retirement Management Board's portfolio will shift slightly in the upcoming fiscal year, unlike the allocation makeover that Alaska Permanent Fund managers recently adopted.

The retirement board manages $14.5 billion in retirement funds for state workers, money which will help pay for health care and retirement for teachers and public employees at the state and municipal levels.

How well the ARM Board investments do will be one of the major factors in deciding how much money state and local governments have to contribute toward employee retirement.

The board met Friday in Anchorage and adopted a new asset allocation strategy for the fiscal year beginning July 1.

The amount of money invested in stocks will change only slightly under the new model, but more of those stocks will be from companies outside the U.S.

The strategy the board adopted calls for investing slightly more money in foreign stocks than it has in the past, said Michael O'Leary, an outside investment advisor working for the board.

The new model is "part of the continuing evolution toward less discrimination between domestic and international" investments, said O'Leary of Callan Associates.

The board reduced the allocation to the category called "absolute return," which includes hedge funds, at the request of Chief Investment Officer Gary Bader.

Hedge funds can use an extremely wide variety of ways to make money, and can be risky and sometimes controversial, Bader said.

Some, such as the fraudulent hedge funds run by New York money manager Bernie Madoff, have made it out of the financial press into the mainstream media. Madoff is awaiting sentencing on charges for his $50 billion Ponzi scheme that defrauded investors.

Bader said having too much money with any one hedge fund manager presents what he called "headline risk" to the state.

"I can tell you if one small hedge fund blows up, I get calls from the local media," Bader said. "If Microsoft drops five points in one day, I wouldn't get any calls at all."

In addition to dropping the allocation to absolute return by one percentage point, Bader also said they'll be diversifying their hedge fund investments among more managers in a separate action.

The possible changes to the allocation strategy have been reviewed previously, and only just confirmed Friday. O'Leary said in April that "any one of the changes is very small, and at the aggregate level the changes do not have a significant effect on the expected volatility of the portfolio," he said.

The Alaska Permanent Fund Corporation Board of Trustees recently changed how it controlled it asset allocation. Instead of looking at types of investments, such as stocks, bonds or real estate, it will start looking at what it calls "risk exposure."

The new permanent fund asset allocation model includes a category for exposure to companies, which can be in either stocks or bonds, as well as exposure to interest rate or other risks.

Both the ARM Board and the permanent fund have policies calling for rebalancing as market changes throw their portfolio out of line with their target asset allocations.

So if stock values decline, which happened over the last year, fund managers would sell other overrepresented investments, bonds for example, and buy stocks until they were at their target allocation. That system forces managers to buy low and sell high, improving returns in the long term.

The ARM Board has been following that policy, but the Permanent Fund Board of Trustees delayed rebalancing, fearing that stocks would fall even further and that bonds would go up. Instead, the $30.5 billion permanent fund missed some of the gain when stocks unexpectedly rose in the last few months.