Since the financial crisis, public pension plans – like other large institutional investors – have moved a significant portion of their portfolios into investments outside of traditional equities, bonds, and cash. These alternative investments include a diverse assortment of assets – private equity, hedge funds, real estate, and commodities. This shift reflects a search for greater yields than expected from traditional stocks and bonds, an effort to hedge other investment risks, and a desire to diversify the portfolio. The Public Plans Database (PPD), which covers nearly 95 percent of pension assets, shows the allocation to alternatives more than doubling (from 9 percent to 24 percent) between 2005 and 2015.
This brief begins to explore the implications for state and local pension plans of moving away from traditional stocks and bonds to other types of assets. The scope of the inquiry is narrow; it does not address fees, disclosure, or administrative issues. Nor does it assess how these alternative assets are utilized within each plan’s overall investment strategy.