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

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Abstract
Purpose The purpose of this study is to identify how asset allocation was made by asset ownersthrough alternative investment when the low-interest rate era was getting longer and to verifyprevious research concluding that that pension fund allocations to hedge funds and otheralternatives had increased in the U.S. and internationally under the historically low bond yieldsenvironments.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 NorthAmerica. We also use data of interest rates of 2 Year UST (2Y UST) and 10 Year UST (10YUST) from January 2010 to December 2019 and make monthly average figures of interest ratesof 2 Year UST and 10 Year UST for our analysis of relations between rates movements andasset allocation portions of alternative investments. Our initial hypotheses are that rates of 2YUST 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 publicpensions we selected as samples. We found that the proportion of alternative investmentallocation to the rate change was not significantly affected. As alternative investments excludinghedge funds are mid- and long-term ones for more than five to ten years, we wanted to makea more meaningful observation of how the 10-year U.S. government bond rate affected theallocation of alternative investment assets.Research Implications Further research on public pensions and insurers in other regions willhave to be conducted in the future, considering the results of asset allocation to alternativeinvestments in large public pension funds in both the U.S. and Europe. Besides, the previouslypublished researches said that the proportion of alternative investments increased with theinterest rate falling, which was not necessarily the case.