Pension Funds Shoveling Money Into Alternative Investments

Pension funds have steadily been increasing their allocation of capital to alternative investments, largely because of the asset class' ability beat rising inflation and incur less risk than traditional investments. According to a recent report by Cliffwater LLC, an adviser to institutional investors, between 2006 to 2012, State pension funds more than doubled their allocations to alternative investments, like private equity, real estate, hedge funds, hard assets and commodities. Accumulating almost $600 billion in assets, these nontraditional investments now comprise 24 percent of public pension fund holdings. Where did the capital come from? It would seem that the funds dropped their investments in stocks to 49 percent from 61 percent, over the last six-years.

The International Monetary Fund (IMF) released a report in late 2013 that suggested that over the course of the last 10 years, the average U.S. public pension fund earned a return of 6.4 percent a year. Although regarded as very healthy by some, it is clearly not enough to meet the 8 percent return that is guaranteed to government employees. In an effort to take pressure off the State budgets that must cover the repeated losses, the IMF revealed that many State pension funds have been moving billions of dollars to alternative investments, that are promising to deliver much higher yields with much less risk.

It has become increasingly evident that in the uncertain global economy, alternative assets have become more appealing (than traditional assets) to both pension fund managers and institutional advisers. Although there is no guarantee that every alternative asset will consistently outperform traditional assets, for now State pension funds have good reason to support a move toward investing in alternative investments.