Private Equity and Real Estate Allocation in Public Pension Funds

Pension funds have been an investing strategy used by large corporations and government entities to provide income to their employees in retirement. These funds have traditionally used equity and debt investments, but pension funds have seen a rapid rise in allocation towards alternative investments. Pension funds have a fiduciary requirement to their constituents, and alternative investments have been debated if they fit this requirement due to their alleged risky nature. This study analyzes how the level of allocation towards alternative investments, specifically private equity and real estate, affects the total return of pension funds from 2001-2021. Our study initially compares broad allocation towards alternatives with that of traditional investments in debt and equity and finds that a higher allocation towards alternative investments have a positive effect on returns in short term (1 year) as well as long term (5 years) whereas a higher allocation towards traditional investments do not have an effect (long term) or have a negative effect (short term) on returns. We also analyze the specific investment vehicles of real estate and private equity. Our investigation finds that private equity has a positive effect on pension fund returns in short as well as long term, while real estate has a positive effect on returns, but only in a longer time horizon.