The Right Tool in the Right Hands: The Role of Alternative Assets in a Long-term Institutional Portfolio

Abstract

We compare the investment philosophy and management style of the Norwegian Government Pension Fund Global (GPFG), Canada Pension Plan (CPP), and Australian Future Fund (FF) with focus on extracting the role of alternative assets in these portfolios. We decompose fund returns into manager skill (alpha) and exposure to (1) the market, and other compensated factors, or (2) benchmark indices. We find that GPFG and FF’s returns are consistent with their stated models. FF’s results indicate that if deployed effectively, exposure to alternative assets can improve risk-adjusted performance. However, as we observe for CPP, the illiquid and opaque nature of alternative assets can also provide scope for managersmoothed returns, especially in combination with internal investment management. Overall, our paper proposes that the inclusion of alternative assets in a long-term institutional portfolio can provide diversification benefits, but we caution that accurate and timely disclosure of investment performance is critical. The performance of alternative assets should be assessed with a healthy degree of scepticism in cases where management and reporting of the assets is performed by the same group.