Abstract
Pension funds only explored alternative assets quite recently, prodded by financial crises which devastated equity returns and led to low bond returns. We assess the addition of alternative assets to pension fund portfolios in terms of the total benefit derived from diversification, addition of positive skewness, and the elimination of left tails in the return distribution. During 1994-2012, adding portfolios of hedge funds has significantly higher total benefits than adding real estate, commodities, foreign equities, mutual funds, or funds of funds. Conditioning on past total benefits improves the out-of-sample performance even further as total benefits are more persistent than alpha.
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