Have Alternative Investments Helped Pensions?

A recent article in the New York Times points out that pension funds that have stuck to more traditional investments have outperformed pensions that have a higher concentration of alternative investments like private equity, hedge funds and real estate.  This begs the question are alternative investments worth it?  Based simply on the article its hard to judge given that the time period reviewed is such a short time horizon.  The pensions have much longer time horizons and over longer periods of time it is possible that these alternative investments could add value.  However, due to their high fee structures they must reach a significantly higher performance hurdle in order to deliver value.

The significant issue to be gleaned from the data presented in the article is that the alternative heavy portfolios underperformed despite a large financial shock that occurred over the 5 year time horizon examined.  Proponents of adding alternative investments to a portfolio argue that the investments provide diversification and downside protection from major financial shocks.  Many hedge funds seek absolute returns, meaning positive returns in all market environments and private equity investments are expected to provide performance uncorrelated with the stock market.  However, when these investments were needed most, in the throes of the Great Recession, they did not aid pensions’ portfolios.  If these investments are not providing the benefits their proponents claim then it should make investors think twice about an allocation.

There is no guarantee that any investment strategy, including those described here, will be successful. Any investment or investment strategy can lose money. Past performance does not guarantee or predict future results. You should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from Raffa Wealth Management, LLC. This information was gathered from reliable sources but we cannot guarantee accuracy. Indexes do not reflect the fees associated with actual investments and such fees would reduce the performance illustrated.
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