Despite the long-term decline in interest rates, most public pension plans adopt similar assumed rates of return to those they chose over 20 years ago. As a result, plans have been increasing risk premium, forcing them to turn to riskier investments over time . Therefore, hedge funds and other alternative investments have become popular among public pension funds, with $450 billion in US public pension assets invested in hedge funds as of mid-2014.
New research from the Roosevelt Institute examines the claim that hedge funds deliver superior and less correlated returns for public pension funds, based on an analysis of 11 US public plans’ experience. The report finds that not only did hedge funds underperform the total fund nearly 75 percent of the time, their performance was significantly correlated with the total fund performance. Moreover, hedge fund fees are expensive. The report estimates that the reviewed pension funds paid 57 cents in hedge fund fees for every dollar of net return.
The authors recommend public pension funds that are currently invested in hedge funds review their asset allocation and require full and public fee disclosure from hedge fund managers.
To read the full report, go here.
Stay in Touch with Our Pension Experts
Reason Foundation’s Pension Integrity Project has helped policymakers in states like Arizona, Colorado, Michigan, and Montana implement substantive pension reforms. Our monthly newsletter highlights the latest actuarial analysis and policy insights from our team.