Public Pension Fund Study: High Fee Strategies Like Private Equity Lose Billions Compared to Cheaper Alternatives

Posted on September 24, 2015 by Yves Smith

The Maryland Policy Institute issued a report this summer on the impact of high fee strategies on public pension fund returns. The results are devastating as far as high-fee strategies, both alternative investments like hedge funds, infrastructure funds, and private equity are concerned, as well as active managers. Needless to say, followers of John Bogle would not be surprised, but a horde of pension consultants have apparently succeeded in persuading public pension fund staff and trustees that they can find someone with a hot hand who can deliver them sparking performance…if they are willing to ante up for it.*

I’ve embedded the short, tartly worded paper at the end of the post and urge you to read it in full. It shows the high cost of investing in high fee strategies:

The study also shows that a passive index that mimics the investment allocation of the typical state pension fund outperformed the peer group median by 1.62 percent per year over a five-year period. On an initial $50 billion pension fund, this difference over five years is equivalent to $6.8 billion in foregone income.