A small group of investment consultants has played an outsized role in steering US public pension funds toward private markets over the past two decades, according to a new study by researchers at Harvard and Stanford universities. The shift, which has helped private equity, real estate, and hedge funds flourish, was less a response to pension fund fundamentals than a result of advisers encouraging portfolios to chase higher returns.
The study found that from the early 2000s, the share of US public pension investments in alternative assets has tripled, rising from roughly 10% of total allocations to more than 30% today. These allocations have fueled a golden era for private-market managers while reshaping the retirement prospects of millions of Americans.
Consultant Recommendations Drive Allocation
Researchers Emil Siriwardane of Harvard and Juliane Begenau and Pauline Liang of Stanford concluded that the single best predictor of a pension fund’s exposure to alternatives is the consultant it hires. Firms like Meketa, NEPC, and Wilshire advise funds managing approximately $5 trillion, and their recommendations have consistently encouraged higher allocations to private assets.
Between 2001 and 2021, the average consultant’s expected “alpha”—the amount they forecast alternatives would outperform public equities on a risk-adjusted basis—rose by roughly 60 basis points. Notably, consultants did not view alternatives as providing significant diversification, meaning the private assets were expected to behave similarly to equities, while promising additional returns.
“In short, consultants didn’t view alternatives as a hedge. They viewed them as a source of extra return,” the study notes. That perception, encoded in their capital-market assumptions, became a key driver of trillions in public pension allocations.
Implications and Risks
The findings highlight the potential vulnerabilities of public pension portfolios. “A key risk is whether these beliefs are justified—and whether pensions can actually pick the best managers,” said Siriwardane. “If not, they’re potentially misallocating trillions of dollars of retirement money and paying billions in excessive fees.”
While some industry insiders, such as Steve Foresti, chief investment officer emeritus at Wilshire, argue that consultants played a guiding rather than dominant role, the study underscores that advisory forecasts shaped pension risk-taking in ways that traditional capital-market models may not fully explain.
Dan Rasmussen, founder of Verdad Advisers, emphasized that capital market assumptions are “persuasive tools” that shape institutional behavior, framing risk and legitimizing allocation shifts. This influence has helped propel alternative assets’ share in US pensions well above global market levels, with allocations overweight by 17 percentage points relative to a neutral portfolio.
Looking Ahead
The study leaves open whether the high allocations to private assets will deliver on their promised returns. Historical evidence suggests that pensions with the largest exposure to alternatives have not necessarily outperformed peers. Researchers warn that overly optimistic assumptions could harm both liquidity and funding, posing significant challenges for public retirement systems if market conditions change.
In a financial landscape where a few advisers can reshape the retirement futures of millions, the study underscores the need for careful scrutiny of alternative investments and the forecasts that drive them.
