It’s no secret that pensions, facing cringing future liabilities as the ranks of pensioners grow, are near-desperate for returns.

They have turned aggressively to alternative investments, much to the cheer of hedge funds and private equity funds. But is this a mistake? It could turn out quite poorly for some big pensions.

According to Institutional Investor, “Private equity and hedge funds will find it harder to beat the market going forward than they have in the past, according to a new study by J.P. Morgan Asset Management. The study, a 57-page document published last week, projects that median returns on PE during the next ten to 15 years will match that on a midcap long-only stock portfolio, while the median hedge fund will underperform that portfolio. Such a performance would come in sharp contrast to returns over the past 10 years, when PE and hedge funds beat such a portfolio by a minimum of five percentage points.”

Big pensions are counting on superior performance. Given that the authors of the study expect the mid-cap performance of 8.75 percent over the next 10 to 15 years, it may not necessarily be a disaster. But taking big risks and paying massive fees for that sort of return is asking a lot. In the end, this highlights the need for savvy fund picking.

Pensions need winners. Unfortunately, picking funds is like picking stocks these days. There are lots of choices, but no guarantees.

For more:
-here’s the article

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