Are Alternative Investments Prudent? Public Sector Use and Fiduciary Duty

Posted: 13 Nov 2015

See all articles by Paul Rose

Paul Rose

Ohio State University - Moritz College of Law; Bocconi University - BAFFI Center on International Markets, Money, and Regulation; Tufts University - The Fletcher School of Law and Diplomacy; Fundación Instituto de Empresa, S.L. - IE Business School

Jason S. Seligman

U.S. Department of the Treasury - Office of Economic Policy

Date Written: November 12, 2015

Abstract

Over the last decade, public pension systems have shifted away from equities and fixed income in favor of alternative investments. We construct panel data of legislative changes affecting pensions, merging these with fund level data from the Public Plans Database. Using these in tandem with data from Preqin we consider governance and financial performance motivations, as well as principal-agent and herding problems that may be unique to alternative investments. We find less liquid alternatives can be of value as a result of (1) better performance and (2) relatively consistent observed pricing. However we also find evidence that Alternatives’ relative performance has waned since 2007 while allocations have continued to grow. Further while some use is justified the prudent person standard is of little protection against herding risks due to its relative benchmarking schema. Given evidence that legislatures are relatively reactionary monitors we conclude that hybrid allocation rules merit consideration.

Note: The views in this piece are the authors’ and do not necessarily represent official views of the United States Department of Treasury.

Keywords: Pension Funds, Fiduciary Duty, Alternative Investments, Hedge Funds, Private Equity, Investment, Political Economy, Governance

JEL Classification: K2, K22, K23, K29, K31

Suggested Citation

Rose, Paul and Seligman, Jason S., Are Alternative Investments Prudent? Public Sector Use and Fiduciary Duty (November 12, 2015). Ohio State Public Law Working Paper No. 319. Available at SSRN: https://ssrn.com/abstract=2689859 or http://dx.doi.org/10.2139/ssrn.2689859

Paul Rose (Contact Author)

Ohio State University - Moritz College of Law ( email )

55 West 12th Avenue
Columbus, OH 43210
United States

Bocconi University - BAFFI Center on International Markets, Money, and Regulation ( email )

Milano, 20136
Italy

Tufts University - The Fletcher School of Law and Diplomacy ( email )

Medford, MA 02155
United States

Fundación Instituto de Empresa, S.L. - IE Business School ( email )

Calle Maria de Molina 12, Bajo
Madrid, Madrid 28006
Spain

Jason S. Seligman

U.S. Department of the Treasury - Office of Economic Policy ( email )

1500 Pennsylvania Avenue
Washington, DC 20220
United States
(202) 622-1683 (Phone)

Register to save articles to
your library

Register

Paper statistics

Abstract Views
1,472
PlumX Metrics