Concern about the Indiana Public Retirement System investment results [March 16] arises from a revolution in institutional investing that started in the 1960s.
Computer capability to gather, massage and compare data led to consulting that help institutions create policies and measure and compare results. To enhance their services, consultants created a “new” asset class called “alternatives,” which implies a false premise that investment markets offer more than just equity and debt when, in fact, all “alternatives” are variations or mixtures of equity and debt.
To add value, consultants began recommending “alternatives,” such as managed commodities, hedge funds and private equity, offering the attractive hypothesis that these asset classes will smooth results, that volatility will be reduced and painful periods of negative returns (that lead to newspaper headlines) will be avoided.
Unfortunately, the modern system of allocations is complicated and seldom lives up to its goal of smoothing results, as demonstrated by Indiana’s poor performance in the second half of last year.
In the committee room, six months of poor performance appears significant. It is not significant.