The way that groupthink hurts the average pension recipient is appalling. The ones making the investment decisions for the bus driver, schoolteacher, and janitor are supposed to be fiduciaries. As such, it’s their responsibility to make sure the pensions that were promised are not gambled away in the markets through vehicles like hedge funds. But when it comes time to make a decision on whether or not to invest in a hedge fund, committee members have reams of reports and presentations to fall back on. They can also point to other pension funds that invested right along with them to prove they weren’t going it alone.
The trouble with looking at a hedge fund index for guidance on a strategy is that all the funds that went out of business are no longer included. It puts all the weight into the surviving funds, making the returns look better than they are. In the real world, if you buy a stock, you can’t simply forget about it if it goes bankrupt. You lose your money. But that’s exactly what happens with historical performance for an index. The fund is scratched out and replaced by a viable company or simply not counted. That’s lost on the average pension board member with little investment experience. And unfortunately, it’s the recipient of the pension who pays the price for this ignorance.