Pension funds have increased their allocation to alternative investments in recent years. Alternative investments refer to investments that fall outside the traditional domain of equities, fixed income and cash. Alternative asset categories include commodities, hedge funds, infrastructure, private equity and real estate.

Alternative investments allow pension funds to improve diversification by expanding the investment universe. Alternative assets are often not readily traded on public markets for which investors will demand compensation. As very long-term investors, pension funds are well-positioned to take advantage of this liquidity premium. Many alternative asset classes provide a good hedge against inflation risks, as well.

Pension fund investments in alternative asset categories are also beneficial to society by ensuring – for example – a long-term supply of capital to innovative start-up companies and infrastructure projects.

EFRP believes that alternative investments should be judged by the prudent person principle instead of being subject to quantitative restrictions. An important raison d’ȇtre of pension funds is their ability to invest in a wide range of asset classes. Better diversification means that pension funds can provide plan members with higher retirement benefits at lower risk.

See also:

EFRP Response – EU Commission Consultation on Hedge Funds – January 2009
EFRP Response – EU Commission Financial Services – Expert Group Reports (July 2006) – October 2006