Unpacking the Rise in Alternatives

41 Pages Posted: 11 May 2022

See all articles by Juliane Begenau

Juliane Begenau

Stanford University - Graduate School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Emil Siriwardane

Harvard Business School - Finance Unit; National Bureau of Economic Research (NBER)

Pauline Liang

Stanford Graduate School of Business

Date Written: May 10, 2022

Abstract

We document a large and heterogeneous shift by public pensions into alternative investments (hedge funds, private equity, and real estate) since 2006. Interpreting the data through the lens of the two-fund separation theorem we find that pensions' attitude towards taking risk cannot account for the size and heterogeneity of the shift. Pension characteristics like size and underfunding explain almost none of the cross-sectional heterogeneity in the shift to alternatives but some of the shift out of fixed income. In contrast, our results are consistent with a sizable shift in beliefs changing the composition of the risky portfolio. Consistent with this hypothesis, a simple variance decomposition shows that investment consultants explain nearly 25% of the variation of which pensions shifts into alternatives. After controlling for consultants, we also document evidence of peer effects in the sense that pensions are more likely to invest in alternatives if their neighbors do.

Keywords: Public Pensions, Private Equity, Alternatives, Underfunding, Beliefs, Reaching for Yield

JEL Classification: G11, G23, G29, G41, H55, H75

Suggested Citation

Begenau, Juliane and Siriwardane, Emil and Liang, Pauline, Unpacking the Rise in Alternatives (May 10, 2022). Stanford University Graduate School of Business Research Paper , Available at SSRN: https://ssrn.com/abstract=4105813 or http://dx.doi.org/10.2139/ssrn.4105813

Juliane Begenau (Contact Author)

Stanford University - Graduate School of Business ( email )

Stanford, CA 94305
United States
6507245661 (Phone)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Emil Siriwardane

Harvard Business School - Finance Unit ( email )

Boston, MA 02163
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Pauline Liang

Stanford Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305
United States

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