Asset Classes Explained: Alternatives

Note: This article is part of a series highlighting each of PERA’s investment asset classes and how they contribute to a diversified portfolio that provides reliable income to Colorado’s retired public employees.

As an institutional investor, Colorado PERA invests in all the major investment asset classes you may be familiar with: Global Equity, Fixed Income, Real Estate, and Private Equity.

But what about opportunities that don’t fit neatly into one of those boxes?

That’s where Alternatives come in. As of September 30, 2022, Alternatives made up about 6% of PERA’s total portfolio.

What are Alternatives?

Simply put, Alternatives are investments that fall outside the other asset classes . They can be funds that include multiple types of assets, or a different type of investment entirely. Alternatives can involve new and innovative investment opportunities, complex or difficult strategies, or owning actual property.

PERA’s Alternatives team categorizes its investments into three groups based on the strategy underlying each type of asset:

• Opportunistic: This strategy can include acquiring corporate debt of public and private companies, direct loans to private companies, and other types of transactions where the underlying assets are trading at discounted prices.
• Real assets: Similarly to Real Estate, this strategy focuses on “hard” assets that provide stable income over time. That can include timberland, farming operations, infrastructure projects like wind and solar energy, and even intellectual property like music royalties from radio stations and streaming services.
• Risk mitigation: This group of investments includes various types of hedge funds, which can provide “downside” protection — in other words, they help limit the portfolio’s losses in down markets.

Gary Ratliff, Director of Alternatives at Colorado PERA, said PERA was an early adopter of these types of investment strategies.

“Back in 2008, The PERA Board of Trustees had the foresight to create an opportunistic asset class, which could take advantage of opportunities in hybrid investments which did not fit neatly into a single asset class or new investment funds which were designed as multi-asset class products,” Ratliff said. “Today, many of our peer institutions have followed suit.”

Click here for more information on PERA’s Alternatives holdings.

Why invest in Alternatives?

PERA maintains a well-diversified portfolio with a focus on long-term financial sustainability. That diversity is key, as it reduces the risk that any one investment or group of investments will threaten the stability of the overall fund.

While Alternatives can be complex and carry higher costs than more traditional investment types, they also provide better risk-adjusted returns and reliable income.

“In simple terms, a soundly constructed portfolio of Alternative investments can help PERA save money in a down market because the investments don’t experience the same kind of volatility as other assets like stocks,” Ratliff said. “That strategy helps ensure we can continue to provide reliable lifetime income to Colorado’s public employees.”

More information about PERA’s investments:

• Colorado PERA Investment Stewardship Report
• Statement of Investment Policy
• PERA Asset Allocation
• PERA asset classes
• PERA Investment FAQs

Asset allocationThe amount of a fund allocated to certain asset types (e.g. public equities, fixed income, private assets).VolatilityVolatility of returns is the measurement used to define risk. It describes the variation of price of a financial instrument over time. The greater the volatility, the higher the risk.Private equityEquity capital that is not quoted on a public exchange. The majority of private equity consists of institutional investors and accredited investors who can commit large sums of money for long periods of time.Fixed incomeSecurities representing debt obligations and usually having fixed interest payments and maturities. Different types of fixed income securities include government and corporate bonds, mortgage-backed securities, asset-backed securities, and may also include money market instruments.Asset classA category of investments that share certain characteristics and exhibit similar patterns of return.Asset classA category of investments that share certain characteristics and exhibit similar patterns of return.Asset classA category of investments that share certain characteristics and exhibit similar patterns of return.