Practical Applications of Alternative Asset Fees, Returns, and Volatility of State Pension Funds: A Case Study of the New Jersey Pension Fund

Practical Applications Summary

In Alternative Asset Fees, Returns, and Volatility of State Pension Funds: A Case Study of the New Jersey Pension Fund from the Winter 2020 issue of The Journal of Alternative Investments, authors Jeff Hooke (Johns Hopkins Carey Business School), Carol Park (Maryland Public Policy Institute), and Ken C. Yook (Carey Business School) investigate whether state and municipal pension funds are benefiting from their increased investments in alternative assets. The authors focus on whether the performance of alternative asset funds is good enough to justify their relatively high fees.

Examining the New Jersey state pension fund—whose annual reports provide the most detailed data—they find that its private equity (PE) and hedge fund (HF) holdings both underperform commonly used benchmarks, and its HFs’ performance is substantially correlated with that of publicly traded assets while also being more volatile. Therefore, the PE and HF performance and diversification qualities are not good enough to justify their higher fees. Also, those fees are inadequately reported due to a questionable “honor system” of fee reporting and a lack of auditing. For all these reasons, the authors recommend that pension funds substantially reduce their alternative-asset holdings.

TOPICS: Pension funds, retirement, private equity, portfolio construction