Avoid Bias In Alts Investing
Allocations by institutional investors to alternative investment classes have risen substantially during recent decades. By 2010, the 1,000 largest sponsors of public pension funds allocated on average more than 17% of their assets to alternatives, including 9% to venture capital and buyout funds and 6% to real estate. At the average university endowment, alternatives in 2010 made up more than a quarter of the portfolio, approximately half of which was venture capital, buyout and real estate.
Yael Hochberg and Joshua Rauh—the authors of the study “Local Overweighting and Underperformance: Evidence from Limited Partner Private Equity Investments,” which appeared in the February 2013 edition of The Review of Financial Studies—contributed to the literature by examining the allocation to, and performance of, investments by institutional investors serving as limited partners (LPs) in buyout funds, venture capital funds and real estate private equity funds, a class collectively referred to as private equity (PE).
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