New Draft Research: Are Alternative Investments Prudent? Public Sector Use and Fiduciary Duty

I recently uploaded to SSRN a draft of a paper I’ve written with Jason Seligman (U.S. Treasury) on whether the increased use of alternative investments by public pension funds are consistent with their fiduciary duties.  The final paper is forthcoming in the Journal of Alternative Investments.  Here is the abstract:

Over the last decade, public pension systems have shifted away from equities and fixed income in favor of alternative investments. We construct panel data of legislative changes affecting pensions, merging these with fund level data from the Public Plans Database. Using these in tandem with data from Preqin we consider governance and financial performance motivations, as well as principal-agent and herding problems that may be unique to alternative investments. We find less liquid alternatives can be of value as a result of (1) better performance and (2) relatively consistent observed pricing. However we also find evidence that Alternatives’ relative performance has waned since 2007 while allocations have continued to grow. Further while some use is justified the prudent person standard is of little protection against herding risks due to its relative benchmarking schema. Given evidence that legislatures are relatively reactionary monitors we conclude that hybrid allocation rules merit consideration.

The views in this piece are our own, and do not necessarily represent official views of the United States Department of Treasury.


The paper can be downloaded here.


New Draft Research: Sovereign Funds and Domestic Political Legitimacy

This paper, forthcoming as a book chapter in the Oxford University Press Handbook on Sovereign Wealth Funds, builds on work by Gordon Clark, Adam Dixon, Ashby Monk and others in discussing the domestic political risks faced by SWFs.  Comments welcome!

As Sovereign wealth funds (SWFs) mature and as the literature describing and analyzing SWFs continues to develop, some of the primary concerns that initially animated SWF analysis — namely, SWFs as a sign of shifting financial power, SWFs as potential political actors, and the corresponding protectionist responses from governments — have turned to fundamental concerns about how SWFs are governed. Even within this literature, however, questions of governance are often focused not on the domestic impacts of SWF governance, but on SWF governance as risk mitigation for other entities and governments. For some analysts and regulators, SWFs must be quarantined; little thought is given to the health of the SWF itself, so long as it does not adversely affect other entities.

This draft chapter (forthcoming, Oxford University Press Handbook on Sovereign Wealth Funds) discusses SWF governance as a domestic political issue, and not merely as an international political issue. In particular, this chapter adds to the literature on the domestic legitimacy of SWFs, and how poor management of SWFs can create or exacerbate domestic political risks. Among the threats to legitimacy are issues involving ultimate ownership of the fund, corruption, unclear of shifting purposes of the fund and the use of the fund’s earnings, and misalignment of the fund with societal mores and interests.

The paper is available for download here.