Pension Funds Making Alternative Bets Struggle to Keep Up
Searching for higher returns to bridge looming shortfalls, public workers’ pension funds across the country are increasingly turning to riskier investments in private equity, real estate and hedge funds.
But while their fees have soared, their returns have not. In fact, a number of retirement systems that have stuck with more traditional investments in stocks and bonds have performed better in recent years, for a fraction of the fees.
Consider the contrast between the state retirement fund for Pennsylvania and the one for Georgia.
The $26.3 billion Pennsylvania State Employees’ Retirement System has more than 46 percent of its assets in riskier alternatives, including nearly 400 private equity, venture capital and real estate funds.
The system paid about $1.35 billion in management fees in the last five years and reported a five-year annualized return of 3.6 percent. That is below the 8 percent target needed to meet its financing requirements, and it also lags behind a 4.9 percent median return among public pension systems.
In Georgia, the $14.4 billion municipal retirement system, which is prohibited by state law from investing in alternative investments, has earned 5.3 percent annually over the same time frame and paid about $54 million total in fees.
The two funds represent the extremes, with Pennsylvania in a group of pension systems with some of the highest percentages of investments in alternatives and Georgia in a group of 10 with some of the lowest, according to groupings of funds identified by the London-based research firm Preqin.
An analysis of the sampling presents an unflattering portrait of the alternative bets: the funds with a third to more than half of their money in private equity, hedge funds and real estate had returns that were more than a percentage point lower than returns of the funds that largely avoided the riskier assets. They also paid nearly four times as much in fees.