With traditional fixed income investments like bonds offering low yields in today’s market, pension fund managers are increasingly looking to alternative investments to maximize returns. Fidelity Investments, a leading provider of retirement and investment services, offers pension funds a variety of alternative investment solutions. In this article, we will explore how adding alternative investments like private equity, real estate, and hedge funds to pension portfolios can enhance diversification and long-term performance. Alternative investments come with higher risks compared to traditional stocks and bonds, but fiduciary standards require pension funds to evaluate these options prudently.
Private equity strengthens growth opportunities
According to Preqin research, private equity delivered 10-year returns of 15.3% compared to 9.8% for the S&P 500 as of December 2020. With higher potential returns than public stocks, private equity provides a way for pension funds to meet long-term obligations amid lower bond yields. Fidelity offers private equity investment trusts that pool capital from multiple clients. By investing in a diversified private equity portfolio, pension funds can gain exposure while reducing idiosyncratic risk. However, private equity comes with less liquidity and transparency. Pension fund managers must weigh the long-term return potential against these drawbacks.
Real estate offsets volatility and inflation
Real estate investment trusts (REITs) invest in various types of properties and allow pension funds to gain exposure without directly owning real estate. REITs provide stable income via dividends and moderate volatility compared to stocks. With inflation expected to rise in coming years, real estate could also provide a hedge as rents and property values often increase with inflation over time. Fidelity’s REIT funds offer actively managed portfolios, providing pension funds with professional security selection. Still, real estate tends to be less liquid than other asset classes. Pension funds need to be strategic when adding REITs to ensure sufficient liquidity for distributions.
Hedge funds enhance diversification
Pension funds look to hedge funds to provide non-correlated returns across various market environments. Hedge fund strategies include long/short equity, event driven, relative value, and more. This diversification aims to smooth volatility over market cycles. While hedge fund complexity introduces opaqueness, Fidelity provides education and resources to evaluate strategies. Performance-based fees could also impact long-term costs. Thus, pension funds should commit limited proportions to hedge funds and closely monitor risks, returns, and costs.
Alternative investments like private equity, real estate, and hedge funds can strengthen pension fund diversification and returns when added prudently. With its large selection, fiduciary approach, and client education, Fidelity Investments empowers pension managers to incorporate alternative investments through vehicles like pooled funds.