The Movement of Interest Rates and Asset Allocation to Alternative Investments: Cases of Public Pension Funds in North America

Abstract

Purpose The purpose of this study is to identify how asset allocation was made by asset owners through alternative investment when the low-interest rate era was getting longer and to verify previous research concluding that that pension fund allocations to hedge funds and other alternatives had increased in the U.S. and internationally under the historically low bond yields environments. Design/Methodology/Approach Data were collected (from the year 2010 to December 2019) on asset allocation portions to alternative investments from 14 public pension funds in North America. We also use data of interest rates of 2 Year UST (2Y UST) and 10 Year UST (10Y UST) from January 2010 to December 2019 and make monthly average figures of interest rates of 2 Year UST and 10 Year UST for our analysis of relations between rates movements and asset allocation portions of alternative investments. Our initial hypotheses are that rates of 2Y UST and 10Y UST affect alternative investment portions of each pension funds (AI_Sub_Total). Findings The ratio of alternative investment allocation to the 14 North American public pensions we selected as samples. We found that the proportion of alternative investment allocation to the rate change was not significantly affected. As alternative investments excluding hedge funds are mid- and long-term ones for more than five to ten years, we wanted to make a more meaningful observation of how the 10-year U.S. government bond rate affected the allocation of alternative investment assets. Research Implications Further research on public pensions and insurers in other regions will have to be conducted in the future, considering the results of asset allocation to alternative investments in large public pension funds in both the U.S. and Europe. Besides, the previously published researches said that the proportion of alternative investments increased with the interest rate falling, which was not necessarily the case