The Illinois State Board of Investment has cut $1 billion of hedge funds from its portfolio. The New York State Common Retirement Fund has reduced its allocation to the strategy to 3 percent.

One of the reasons? The fees are too high.

Investors such as pension funds are concerned that the hedge fund model of 2 percent annual management fees and 20 percent performance fee is too high, especially when low-cost index funds are available, Marc Levine, chairman of the Illinois board, said Wednesday at the Bloomberg Invest New York summit. He and two other panelists discussed the price of outperformance, or so-called alpha.

“You’ve got to make some money for us to view it as true alpha,” said Levine, whose $20 billion fund now uses 17 hedge funds, down from 81.

Levine said he’s still willing to pay for it, pending results.

Vicki Fuller, chief investment officer of New York State Common Retirement Fund, which had $186 billion in assets as of December 2016, agreed that the 2 percent management fee is generally too high, but is “intrigued” with a 1-and-30 type strategy if the result is outsize performance.

“My boss, the comptroller, wanted us to get out of hedge funds totally,” Fuller said.

State and local government retirement systems held $3.8 trillion as of September, according to the National Association of State Retirement Administrators. State pension plans had a $1.1 trillion funding gap in fiscal year 2015, according to an April report from the Pew Charitable Trusts.

Illinois’ funding ratio -- the percentage of assets available to pay benefits -- was 40 percent, the third-lowest in the U.S. At 98 percent, New York was tied for second highest.

The Illinois fund had an investment loss of 0.8 percent for the year ended June 2016, according to its annual report. The 10-year annualized return is 5 percent.

Jason Karp, founder and chief investment officer of Tourbillon Capital Partners, advocated for a longer-term time horizon to get better performance, perhaps at least 18 months. The New York-based firm manages a multibillion long-short equity fund and a long alpha fund.

“I want to give up liquidity,” Levine said.