The Rise of Alternatives
Since the 2000s, US public pensions have shifted their risky investments towards alternative assets like private equity and hedge funds, some more aggressively than others. We explore several explanations for these cross-sectional trends, focusing on those implied by the mean-variance models used by most pensions.
Our evidence suggests that the rise of alternatives has been fueled by an increase in their perceived risk-adjusted returns relative to public equities. Pension beliefs are shaped by investment consultants, experience in the 1990s, and peers. Explanations rooted in risk-seeking motives, such as those driven by pension underfunding, have weaker empirical support.
About the Law and Economics Workshop
Michigan’s Law and Economics Workshop provides an opportunity for faculty and students from across the University to engage with cutting-edge law and economics research by leading scholars on a wide range of legal and policy topics.
Professors Adam Pritchard ([email protected]) and Gabriel Rauterberg ([email protected]) organize the workshop. If you would like to receive workshop announcements, please contact Alex Wroble ([email protected]) and ask to have your name added to the workshop’s email list.
