Review & Outlook

Our take on the investing, financial, & economic themes of the day

Is the “Smart Money” Fleeing Alternative Investments?

11 August, 2014 by Ben O'Brien in Commentary

There is a big push by brokers and advisers to get individual investors into the risky and expensive assets class known as alternative investments. One argument for this strategy was that it appeared to be what the so-called “smart money”–the big, sophisticated institutional investors–were doing. As we’ve written in previous posts, we think most “alternative investments” strategies sold to individual investors are overly complex and opaque and expensive and have mediocre returns.



Now it seems just as individual investors are starting to get in, one of the original proponents of alternative investments is getting out. A report in today’s Wall Street Journal writes that California Public Employees’ Retirement System, known as Calpers, which is a $295 billion retirement fund for California state workers that is highly influential in the world of pensions and other public investment funds, is reconsidering alternative investments:

Calpers hinted at a shift away from complex investments last fall when it released a set of investment principles that included a warning that the fund “will take risk only where we have a strong belief we will be rewarded for it.” In February, it approved a new set of investment goals that reduced future exposure to equities and private equity while increasing allocations to bonds and real estate.

One of the more-dramatic moves under consideration is a complete pullback from tradable indexes tied to energy, food, metals and other commodities, according to people familiar with the discussions. Calpers began making such investments in 2007 as a way of diversifying its portfolio and it currently has $2.4 billion in such derivatives, or less than 1% of total holdings.

Calpers was one of the early proponents of alternative investments, and its decisions led the larger shift into these strategies. If big institutions got out of alternatives just as individuals were getting in this would be highly ironic, though, unfortunately this is how trends often work in the financial industry.

We believe that regardless of what the big institutions happen to be doing, simple, transparent and low cost investment strategies are usually best.