A First Look at Alternative Investments and Public Pensions

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The brief’s key findings are:

  • Public pension plans have boosted their holdings in alternative assets, defined as private equity, hedge funds, real estate, and commodities.
  • This shift reflects a search for higher returns, a hedge for other investment risks, and diversification.
  • The question is how the shift has affected returns and volatility over two periods: 2005-2015 and 2010-2015.
  • In terms of returns, a 10-percent increase in the average allocation to alternatives was associated with a reduction of 30-45 basis points, primarily due to hedge funds.
  • In terms of volatility, alternatives did not have a statistically significant effect. Hedge funds reduced volatility, but real estate and commodities increased it.
  • This analysis is only a first look at this area; further research is clearly warranted.