A First Look at Alternative Investments and Public Pensions


Summary:

The brief uses data from PublicPlansData.org to explore which state and local pension plans have the largest allocations in investments outside of public equities, bonds, and cash and the broader impact of aggregate allocation shifts on returns and volatility.

Author(s):
Jean Pierre Aubry, Anqi Chen, Alicia Munnell
Publication date:
June 2017
Filed under:
Research Studies
Key findings:
The brief's key findings include:
  • 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.
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2017 - First Look at Alternative Investments and Public Pensions