Someone just did a study on the best available data, and discovered that private equity and hedge funds under-perform the market by 1.2% annually.
This may not sound like much, but remember compound interest, 11.4% in 10 years, 21.5% in 20 years, and 30.4% in 30 years.
The best guess, because hedge funds deals with pension funds are notoriously opaque, is that they are getting gigged on the funds like a disemboweled tuna:
Private equity, hedge funds, and real estate have failed public pensions for more than a decade.
A study that will be published in The Journal of Investing shows that not only did alternatives not deliver better returns, but adding them to portfolios actually destroyed alpha, the portion of return seemingly not explained by risk. Most people in finance define it more loosely: as the return on an active investment above what an index fund would provide.
“Alpha appears to respond to the presence of alts as if the latter were kryptonite — the greater the exposure, the harsher the effect on alpha,” wrote Richard Ennis, author of the study, a former editor of the Financial Analysts Journal, and co-founder of EnnisKnupp, one of the first investment consultants.
According to the study, public pension funds in the U.S. have generated negative alpha of approximately 1.2 percent annually since the global financial crisis in 2008. Ennis found that private equity didn’t help — or hurt — excess returns. But both real estate and hedge fund exposures detracted significantly from performance.
Endowments, public and corporate pensions, and other U.S. institutions have put about $2 trillion into alternative investments. Institutions have made a dramatic shift since about 2000 from holding mostly public stocks and bonds to adding extensive investments in private markets, because they’ve been convinced that many of these strategies will outperform public markets and add diversity and lower the volatility of their portfolios.
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Ennis collected data on the most transparent institution, U.S. public-sector pension funds, for the 13 fiscal years ending June 30, 2021. His collection methodology demonstrates how hard it is to get comprehensive information on alternatives. Ennis was limited by a number of funds that had different fiscal year-ends, making comparisons difficult, and pensions that didn’t explicitly say that their reported rates of return were net of fees.
So it could actually be worse, because hedge fund fees are typically 2% of the investment PLUS 20% of any profits.
………
Despite the shift in the composition of institutional portfolios, Ennis undertook the study because little research on the behavior of alternatives and whether they improve portfolios has been conducted. That’s because the investments are private — by definition, unlisted companies don’t trade on an exchange where prices are broadcast in real time — and only public pension funds and some large endowments disclose detailed and timely performance data.
Ennis collected data on the most transparent institution, U.S. public-sector pension funds, for the 13 fiscal years ending June 30, 2021. His collection methodology demonstrates how hard it is to get comprehensive information on alternatives. Ennis was limited by a number of funds that had different fiscal year-ends, making comparisons difficult, and pensions that didn’t explicitly say that their reported rates of return were net of fees.
He then used returns-based analysis to explain the returns of a 59 public pension fund-composite and 59 individual funds. From there, he calculated the returns that have been generated above a passive investment — in other words, alpha. Returns-based analysis is a widely accepted method based on the work of Bill Sharpe that identifies underlying market exposures from a series of returns.
Ennis found that in addition to the destruction of alpha, alternatives don’t offer the diversification benefits that institutions expect. “Stock and bond indexes alone capture the return-variability characteristics of alternative investments in the public fund composite for all intents and purposes in the post-GFC era,” said Ennis.
This is why private equity and hedge funds contribute so generously to campaigns.
The politicians get the donations, they lean on the pension funds, which generates the funds for political donations.
It's a self-licking ice cream cone.
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