The Rise of Alternatives
61 Pages Posted: 11 May 2022 Last revised: 24 Oct 2023
Date Written: July 11, 2023
Since the 2000s, U.S. public pensions have rotated heavily out of public equities and into alternative assets like private equity and hedge funds. This behavior is typically attributed to reaching-for-yield incentives created by the secular decline in safe interest rates, like those related to pension underfunding or binding portfolio constraints. We argue that such mechanisms are unlikely to explain the rise of alternatives without a concurrent shift in beliefs. Several facts support the idea that the perceived risk-adjusted return of alternatives has increased over time. Pension beliefs appear to be shaped by consultants, peers, and experience in the 1990s.
Keywords: Public Pensions, Private Equity, Alternatives, Beliefs, Reaching for Yield, Underfunding
JEL Classification: G11, G23, G29, G41, H55, H75
Suggested Citation: Suggested Citation