Public pension plans that invested in alternative assets such as hedge funds had significantly higher standard deviations in return over a five-year period relative to other pension plans but did not have significantly different returns over the same period after measuring risk-adjusted returns with the Sharpe Ratio. The Office of the Comptroller of the Currency released the data in the work paper Alternative Assets and Public Pension Plan Performance.
The paper says plans that invested in hedge funds in 2006 did not have significantly different investment returns compared with those that did not invest in hedge funds. The paper says returns for funds that had 10% or more of their assets in alternative investments performed worse than other pension funds in 2002 and 2003 and significantly better overall in 2004, 2005 and 2006.
The authors say more “seasoned data” must be compiled before any strong conclusions can be made about the effects of hedge funds on public pension funds. The work paper is available at www.occ.gov/ftp/workpaper/wp2008-2.pdf.