Alternatives are in Vogue

Recently, three major studies were released backing up the trend toward including a part of institutional investment portfolios dedicated toward alternative assets.

Assets of the 49 largest private foundations reached $226.3 billion in tax filing year 2016. That is up 3.5% from $218.6 billion the year before and up 29.3% from $175 billion in 2007, according to a study published in November 2018 in Pensions & Investment magazine. Most of that increase comes at the expense of traditional asset classes like stocks and bonds. ³

Since 2007, foundations have significantly increased their allocations to alternative investments such as private equity, hedge funds and real estate — according to the tax filing data.

Separately, a study in September 2018 by The Pew Charitable Trusts of public pensions’ asset allocation showed a sharp rise in alternative investments over the past 10 years. ⁴ See graph below.

Public pensions’ asset allocation showed a sharp rise in alternative investments over the past 10 years. ⁴

³ “Alternatives spark decade of growth for largest funds,” Nov. 12, 2018, article in Pensions & Investments.

⁴ Pew Institute, State Public Pension Funds’ Investment Practices and Performance, September 26, 2018.

Source: Forbes November 29, 2018

In a more recent study, public pensions increased private equity allocations to 10.2% on average in 2018 from 5.6% in 2008, a trend likely to continue in the hunt for yield. Mega plans are hiring more staff to internally manage private equity and other alternative assets, which they expect to beat stocks in the future. The Texas Teachers’ Retirement System invests 40% of its portfolio in alternatives and plans to double its staff in five years.

Source: Bloomberg June 28, 2019

There are over $25 trillion dollars held within U.S. retirement accounts, and less than 2% of those dollars are invested in alternatives. Unfortunately, most retirement investors are incorrectly led to believe that investment options are limited to traditional publicly traded securities.

Source: Forbes, November 29, 2018