Alternative Asset Fees, Returns and Volatility of State Pension Funds: A Case Study of the New Jersey Pension Fund

This case study provides new information about alternative asset fees to many institutional investors by tapping a relatively unknown data source: state pension fund annual reports. Examining the few state pension funds annual reports that track both fixed fees and carried interest fees of private equity funds and hedge funds, we find that average alternative asset fees were 2.48% of the relevant pension fund assets for the fiscal year ended June 30, 2017. In addition, as New Jersey provides the most detailed alternative asset data, this study discusses New Jersey pension fund's private equity and hedge fund (a) returns, (b) fees, and (c) volatility, compared to verifiable and public benchmarks for the five years ended June 30, 2017. Both private equity and hedge fund portfolios underperformed the benchmarks, and the alternative asset industries' claim of higher returns and lower risks than traditional assets is not supported in this study. To the degree that other state pension funds follow the same investment policies and controls as the state of New Jersey, this study concludes that state pension funds should reduce their holdings of alternative asset substantially.