Come for the poor performance, stay for the excessive fees

Via Barry Ritholtz, an analysis of why pension funds invested in hedge funds and whether it was a good idea (answers being politics and no, respectively).

Other than a few hedge funds, performance is sub par. So why do pension funds invest?

This is because the higher the expected return, the lower the capital contributions required of some obligated public entity.

Here is the punchline: Those expected returns are a myth.

So that’s it. Say you have an expected return of 9% and you don’t have to contribute as much to the fund, meaning you don’t have to raise taxes or cut benefits.

Win/win unless you are in the actual pension fund.

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