Researcher Divya Anantharaman examined the determinants and consequences of corporate pension plan investments in hedge funds and private equity and found plans with alternative investments earn higher returns in the pre-crisis period, but also have a worse performance during times of crisis. The report said “overall, there seems to be very little evidence that plans with allocations to alternative assets weathered the market crisis better than their peers who invested only in ‘traditional’ stocks and bonds. If anything, the evidence indicates that they performed slightly worse.”
Anantharaman found highly leveraged firms with low market-to-book ratios and volatile earnings performance are more likely to invest in alternative assets, indicating that financially constrained firms choose alternative investments to increase asset returns and minimize pension contributions. In addition, the research found a nonlinear relationship between plan funding status and alternative investing – very underfunded and well-funded plans are less likely to make alternative investments compared to moderately underfunded plans, suggesting that such plan sponsors may avoid these investments to minimize contribution volatility.
The report can be downloaded here.