Are the changes in alternative assets correlated to a measure of pension fund health? For example, if a plan is underfunded, is it more or less likely to invest in alternatives? Is there a lag or a leading indicator? (First buy alternatives, funding levels fall, buy more? Or funding levels fall, then try to make up for it by buying alternatives?
Part of the problem is that all of the plans have been moving in similar directions, both in terms of alternative allocations and funded ratios. This makes it difficult to do a proper statistical inference.
"Pretty much, every time I have looked, there is a slightly negative correlation between allocation to alternative assets and public pension fund returns (10-year), but it’s a weak correlation.
"And that could simply show that these funds had poorer returns, and then increased allocations to alternatives as a result, because they were trying to chase yields.
"Given none of these funds have static allocation percentages to alternative assets, it might be interesting (later) to see if the lower-returning or underfunded funds were more likely to increase allocations to alternative assets, meaning the negative returns were more tied to them already having a bad performance history to begin with."
Are the changes in alternative assets correlated to a measure of pension fund health? For example, if a plan is underfunded, is it more or less likely to invest in alternatives? Is there a lag or a leading indicator? (First buy alternatives, funding levels fall, buy more? Or funding levels fall, then try to make up for it by buying alternatives?
Part of the problem is that all of the plans have been moving in similar directions, both in terms of alternative allocations and funded ratios. This makes it difficult to do a proper statistical inference.
In my prior looks for correlation: https://marypatcampbell.substack.com/p/choices-have-consequences-public -- I found negative correlation in returns and allocation to alternatives:
[May 2023]
"Pretty much, every time I have looked, there is a slightly negative correlation between allocation to alternative assets and public pension fund returns (10-year), but it’s a weak correlation.
"And that could simply show that these funds had poorer returns, and then increased allocations to alternatives as a result, because they were trying to chase yields.
"Given none of these funds have static allocation percentages to alternative assets, it might be interesting (later) to see if the lower-returning or underfunded funds were more likely to increase allocations to alternative assets, meaning the negative returns were more tied to them already having a bad performance history to begin with."
And these were weak correlations -- R^2 was about 0.1