Higher yields is the reason why pension funds choose alternative investments
In a recent report by Cliffwater LLC, between 2006 and 2013, state pension funds have more than doubled their payouts to alternative investments. These, according to the institutional investors advisory firm, include allocations to private equity funds, real estate projects, hedge funds and commodities. These total to nearly USD600 billion, which constitute 24% of total public pension fund assets.
In contrast, these pension funds have lowered their overall investments in stocks from 61% to just 49% in the same six year period of the study.
The migration is clearly elucidated in a recent report from the International Monetary Fund. In the last ten years, the average US public pension fund earned 6.4% per year but this is below the 8% return guaranteed to government employees. To ease the pressure from state budgets to cover the shortfall in the yields, pension funds instead move towards alternative investments that promise higher returns.