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

Abstract

This case study provides new information about alternative asset fees to many institutional investors by tapping a relatively unknown data source: state pension fund annual reports. Examining the few state pension funds annual reports that track both fixed fees and carried interest fees of private equity funds and hedge funds, we find that average alternative asset fees were 2.48% of the relevant pension fund assets for the fiscal year ended June 30, 2017. In addition, as New Jersey provides the most detailed alternative asset data, this study discusses New Jersey pension fund’s private equity and hedge fund (a) returns, (b) fees, and (c) volatility, compared to verifiable and public benchmarks for the five years ended June 30, 2017. Both private equity and hedge fund portfolios underperformed the benchmarks, and the alternative asset industries’ claim of higher returns and lower risks than traditional assets is not supported in this study. To the degree that other state pension funds follow the same investment policies and controls as the state of New Jersey, this study concludes that state pension funds should reduce their holdings of alternative asset substantially.

TOPICS: Wealth management, retirement, pension funds, private equity

Key Findings

• • The New Jersey pension plan’s private equity fund and hedge fund portfolios (i) are reasonable proxies for both asset classes and (ii) are similar to those of other state pension funds.

• • PE five-year annualized returns (net of fees) were the same as the S&P 500. Hedge fund returns were significantly below the 60–40 index and equivalent to LIBOR+5%.

• • PE return volatility was similar to the S&P 500. HF volatility was greater than the 60-40 and LIBOR+5%. Average annual PE and HF fees were 3.29% and 3.08% respectively.