Pension funds and endowments made a dreadful mistake by loading up on market neutral alternative investments in 2009—the market crashed in 2008—a year too late. When I think of pensions and endowments I picture conference rooms and meetings and not a lot of independent thinking. At the end of the day pensions and endowments are managed by group thinking about yesterday’s problems. What sound and look good today wins—much like a beauty contest. That’s why it’s no surprise pensions and endowment loaded up on alt investments at exactly the wrong time and they’ve been beaten badly by the stock market.
The WSJ reports alternative investments here:
The institutions, ranging from large corporations such as General Motors Co.GM -0.25% to big universities such as Harvard, have been shifting to hedge funds, private equity and venture capital. But while these alternative investments outpaced stocks during 2008’s market meltdown and are seen as potentially less volatile, they have badly lagged behind the S&P 500 since 2009, a period in which U.S. stock indexes have more than doubled.
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Missing out on recent stock gains, though, adds to challenges facing pension funds, some of which don’t have enough assets to meet future obligations. For universities dependent on endowment income, reducing stockholdings represents a lost opportunity in a time of stretched resources.
The recent poor showing has put a spotlight on pension funds and endowments that have turned away from stocks for more than a decade, including the period after the market’s plunge, when stocks became inexpensive relative to their earnings.
“Alternative asset classes are expensive, especially if you have to live with the average fund instead of stellar funds,” said Prof. William Goetzmann of the Yale School of Management. Hedge funds and private-equity firms generally charge investors much higher fees than mutual funds and other traditional investments, including management fees of as much as 2% of assets and a take of any returns.
E.J. Smith