Public Plans Split on Alternatives

March 13, 2008 ( - A survey of investment practices at public pension plans found that about half invest or plan to invest in alternative asset classes in the future - or did six months ago.

According to the survey of approximately 150 public pension plans, just over half (52%) of respondents said they invest or planned investments in alternative asset classes.   Asked to identify all likely alternative investments, real estate emerged as the most popular asset class at 85%, followed by private equity (60%), venture capital (44%), and hedge funds just behind at 42%.   

Restrict “Shuns”

Among the nearly half (48%) of respondents that do not plan investments in alternative assets, reasons cited included such restrictions as they are either not allowed to by law or investment policy, or cited other reasons, such as a conservative board of trustees.

The survey, conducted in the Fall of 2007, is part of a joint study by the Bear Stearns Pension, Endowment and Foundation Services Group and the Government Finance Officers Association (GFOA), a professional group of public sector officers in the US and Canada.

Only 35% of the plans surveyed 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, according to a press release, while 53% invest in fund of funds. When choosing a hedge fund manager, the management firm’s reputation was identified as the most important trait; the management firm’s performance record and quality of their personnel tied as the second most important characteristics.

Twelve-percent of the plans said they used 130/30 strategies, 58% said they are considering it and 30% said they are not.

Consultant Usage

According to the survey, 80% of the plans were advised by consultants on investment decisions and 70% used consultants to perform due diligence on prospective managers. When deciding on whether to invest with a particular manager, however, only 8% rely on consultants, 66% make the decision internally and 27% weigh the opinions of both.

Moreover, public pension plan respondents also 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 the plans surveyed said they were not currently using any risk management tools and 5% said they used internal measures.