Updated Tuesday, July 29, 2014 as of 4:59 PM ET
Portfolio - Investment Insights
Why Public Pension Funds Are Embracing Wall Street: David Crane
by: David Crane
Wednesday, October 23, 2013
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(Bloomberg) -- Public pension funds have been moving huge amounts of money into alternative investments managed by Wall Street.

According to a recent report by Cliffwater LLC, an adviser to institutional investors, from 2006 to 2012 state pension funds more than doubled their allocations to alternative investments, which include private equity, real estate, hedge funds and commodities. Totaling almost $600 billion, these nontraditional investments now constitute 24 percent of public pension fund assets. In contrast, the funds dropped their investments in stocks to 49 percent from 61 percent over the six-year period.

There’s a reason for that big move, as explained in a recent International Monetary Fund report. Over the last 10 years, the average U.S. public pension fund earned a return of 6.4 percent a year, very healthy but not enough to meet the 8 percent return guaranteed to government employees. In an effort to take pressure off the state budgets that must cover those deficiencies, the IMF reports that statepension funds have been shifting billions to alternative investments promising higher yields.

To the casual observer, public pensions and hedge funds might seem like strange bedfellows. Public pension funds like to portray themselves as battlers for the little guy; hedge funds levy sizable fees that often go into the pockets of rich people.

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