November 2021, Paper: "We document a large and heterogeneous shift by public pensions into alternative investments (hedge funds, private equity, and real estate) since 2006. Interpreting the data through the lens of the two-fund separation theorem we find that pensions’ attitude towards taking risk cannot account for the size and heterogeneity of the shift. Pension characteristics like size and funding explain almost none of the cross-sectional heterogeneity in the shift to alternatives but some of the shift out of fixed income. In contrast, our results are consistent with a sizable shift in beliefs changing the composition of the risky portfolio. Consistent with this hypothesis, a simple variance decomposition shows that investment consultants explain nearly 25% of the variation of which pensions shifts into alternatives. After controlling for consultants, we also document evidence of peer effects in the sense that pensions are more likely to invest in alternatives if their neighbors do."
Non-HKS Author Website - Emil Siriwardane