More than half of public pension plans say they currently invest or are planning to invest in alternative asset classes, according to a joint study by the Bear Stearns Pension, Endowment and Foundation Services Group and the Government Finance Officers Association.
Fifty-two percent of plans invest or intend to invest in alternative asset classes. Respondents identified real estate as the most popular asset class at 85%, private equity at 60%, venture capital at 44% and hedge funds at 42%.
The 48% that don’t plan to invest in alternative asset classes say they are either prohibited by law or investment policy, or cited other factors such as a conservative board of trustees.
Of the 150 plans surveyed, 35% 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, while 53% say they invest in fund of funds. A management firm’s reputation was cited as the most important trait when choosing a hedge fund manager, while the firm’s performance record and quality of their personnel tied as the second most important characteristics. Twelve percent of the plans say they used 130/30 strategies, while 58% say they are considering it and 30% are not.
“Our survey found that public pension plans are using very sophisticated and broad investment strategies to manage their assets,” says 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.”
The study also finds that consultants are widely used by plans for investment decisions and due diligence on prospective managers.
It illustrates the wide extent to which consultants are used by public pension plans. Eighty percent of plans are advised by consultants on investment decisions and 70% use consultants to perform due diligence on prospective managers. However, when deciding on whether to invest with a particular manager only 8% rely on consultants, while 66% make the decision internally and 27% do both.
Public pension plans are also using more specialized consultants for research on alternative investments, and 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 respondents say they are not currently using any risk management tools, while 5% say they use internal resources.
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