Casting for Returns

To juice up their sagging portfolios, pension fund managers are seeking alternative investments.

GEAM’s Torey also advises sponsors to be opportunistic rather than dogmatic in committing funds that have been allocated to alternative investments. “We don’t believe in setting hard targets and pushing dollars out the door to meet those targets,” he says. “We think it’s much wiser to be totally opportunistic and bottom-up driven. When we see a good transaction or a good manager, we invest with them. When we’re not seeing what we like, we slow down the activity.”

Remember, too, that dipping a toe into the alternative investment arena won’t wipe out substantial unfunded pension liabilities. “It’s not a silver bullet,” says GMAM’s Reed. “What plan sponsors should expect is they’re going to change the risk-return profile of their fund. We like to say we think you’re either going to get more return for the same risk or the same return for less risk. That’s what all this diversification is all about.”

Slow Growth
Fund allocations to alternative investments.
All plans* 2002 2001 2000 1999
Hedge funds 1.0% 0.6% N/A N/A
Private equity 3.1% 3.1% 2.9% 2.1%
Real estate 3.4% 3.1% 2.4% 2.3%
Public pension funds
Hedge funds 0.1% 0.2% N/A N/A
Private equity 3.1% 3.0% 2.5% 1.7%
Real estate 4.2% 3.9% 3.2% 2.8%
Endowments/Foundations
Hedge funds 7.8% 4.8% N/A N/A
Private equity 8.0% 7.3% 10.3% 6.1%
Real estate 4.2% 4.2% 2.9% 2.4%
Corporate pension funds
Hedge funds 0.4% 0.2% N/A N/A
Private equity 1.9% 2.3% 2.0% 2.0%
Real estate 2.3% 2.1% 1.6% 1.8%
*Source: Greenwich Associates. From interviews between August and October 2002 with 574 corporate funds, 246 public funds, and 212 endowments and foundations. Table shows average fund allocation for all respondents; many respondents had 0% allocation to each asset class.

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