Study: Public Pension Plans Love Alternative Investments

Mar 13 2008 | 11:09am ET

A new survey of investment practices at public pension plans has found an uptick in plans investing in alternative asset classes, with just over half of those polled investing in some sort of alternative investment product. 

According to the survey of approximately 150 public pension plans, 52% of respondents said they invest or planned investments in alternative asset classes. When this group was asked to identify all likely alternative investments, real estate emerged as the most popular asset class at 85%, private equity second at 60%, venture capital third at 44% and hedge funds fourth at 42%.

The survey, conducted in the Fall of 2007, is part of a joint study by the Bear Stearns Pension, Endowment and Foundation Services Group and the Government Finance Officers Association, a professional group of public sector officers in the U.S. and Canada.

The 48% of respondents that do not plan investments in alternative assets said they are either not allowed to by law or investment policy, or cited other reasons, such as a conservative board of trustees.

Only 35% of the plans surveyed invest directly in hedge funds with multi-strategy, equity long/short and market neutral identified as the three most preferred types of hedge fund strategies. Fifty-three percent of the plans surveyed said they invest in fund of funds.

When choosing a hedge fund manager, the management firm’s reputation was identified as the most important trait; the management firm’s performance record and quality of their personnel tied as the second most important characteristics. Twelve-percent of the plans said they used 130/30 strategies, 58% said they are considering it and 30% said they are not.

“Our survey found that public pension plans are using very sophisticated and broad investment strategies to manage their assets,” said Francie Heller, head of the Bear Stearns Pension, Endowment and Foundation Services Group. “The results reveal that investing in alternative assets classes has grown in popularity as an increasing number of public pension plans alter their investment policies and more states pass legislation allowing alternative investments.”

According to the survey, consultants are widely used by public pension plans. The survey found 80% of the plans were advised by consultants on investment decisions and 70% used consultants to perform due diligence on prospective managers.

When deciding on whether to invest with a particular manager, however, only 8% rely on consultants, 66% make the decision internally and 27% weigh the opinions of both. Instead of using only general consultants, public pension plans are using more specialized consultants for research on alternative investments, for example.

The plans also rely heavily on outside experts for risk management. When asked to identify all the multiple techniques and tools used for risk management, consultants were top-ranked at 75%, followed by third party risk platforms or software at 14%. Fifteen percent of the plans surveyed said they were not currently using any risk management tools and 5% said they used internal measures.


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