DB Investing: Alternatives
An Expanding Universe
The waters are tested and sponsors are now diving into alternatives
In 2012, pension investments in alter- natives run the gamut from large plans structuring their own hedge
fund of funds to smaller plans just dipping their toes in the water. One thing is
clear, however: After nearly a decade of
experimenting with alternatives, defined
benefit (DB) plan sponsors are now comfortable with investing in assets other
than the standard bonds and equities.
The quest for higher returns and less
volatility has driven many private plan
sponsors down the path that governmental plans and endowments traveled years
ago. DB plans are looking for investments
that perform well in periods of high volatility, says Caren Bianco, director at PwC’s
Global Human Resource Services in New
York. Bonds have lost appeal because the
yields are too low, she says, so sponsors
are eying alternatives with newfound
interest. Sponsors have seen hedge funds
provide consistent performance relative to
bonds and equities, says Sherwood Yuen,
a vice president and consultant in Callan’s
Alternatives Consulting group, so now
more of Callan’s clients are allocating
assets to alternatives, he says.
Additionally, most corporate plans
have “hurdle rates” of 8% to 9% return
on investment that their assets need to
earn, says Alan Kosan, senior vice presi-
dent and head of the Alpha Investment
Research group for Segal Rogerscasey.
With returns on bonds low and equities
moving sideways, this means that plans
are gravitating toward higher-yielding
strategies—like alternatives. “If they need
growth,” he says, “alternatives have to be
in the portfolio.”
But while acceptance has grown,
according to Bianco, private-sector DB
plan allocations to alternatives are still
limited. Smaller plan sponsors (less
than $100 million in assets) are still not
