In the face of insolvency, many US pension funds are counting on a Hail Mary option: the high-risk/high-reward strategy of alternative investment. On average, a public pension plan now has about 11 percent of its money in alternative investments, including hedge funds, real estate, and venture capital. The Guardian offers some insight on what’s driving this move:
So long as these pension plans offer their beneficiaries gold-plated retirement benefits, money will need to earn high rates of return in order to fund these payments. And despite the ample criticism that has been lobbed at hedge funds and private equity funds since 2008, there has been little traction in attacks on the premise that the best funds really don’t deliver high returns. Certainly not all funds are able to deliver the jaw-dropping returns, but enough are to maintain the momentum of investor allocations necessary to keep the industry afloat.
The unfortunate truth is that, at the present moment, high-risk investments are the only hope for pension funds to meet their promises. The longstanding combination of overly expensive retirement plans and Panglossian projections of asset performance has pension funds backed into a corner. But the potentially high gains that can be made in more risky asset classes come at a high premium to pension funds in the form of management fees. So far, the only clear-cut winner is Wall Street.