Allocations to Alternative Investments

2011 Survey
Summary
1. Roughly 20% of public pension assets and 14% of corporate pension assets are invested in alternatives.1 2. Allocations to alternative investments are increasing among large pension systems and at a rate of approximately 1% to 2% of total assets per year. 3. Endowment allocations to alternatives exceed 50% of assets, up from 37% before the financial crisis. This large increase is likely unintended and temporary, caused by the denominator effect of lower total assets and the inability to easily liquidate private investments. 4. Hedge funds represent the fastest growing subgroup of alternatives.

Public Pension Systems2

Exhibit 1 shows allocations to alternative investments for 97 state-wide pension systems with collective assets totaling $2.1 trillion for their most recent fiscal year, which for most plans ended at June 30, 2010. The median allocation to alternatives is 17% of total assets and the average allocation is 20%.3
Exhibit 1: Allocation to Alternatives by State Pension Systems
60%

50%

Percent Invested in Alternatives

40%

% Alternatives
30%

20%

10%

0%

State Funds Ranked from Highest to Lowest Allocation to Alternatives

Alternatives include private equity, equity real estate, hedge funds and real assets such as oil & gas, infrastructure, and commodities. 2 Sources: Cliffwater; 2010 Comprehensive Annual Financial Reports 3 The average allocation is calculated by taking the dollar allocation to alternatives across all pension systems and dividing by total pension assets for all systems. An average 20% allocation that exceeds a 17% median allocation means that larger pension systems tend to have higher alternatives allocations.

2011 Cliffwater LLC. All rights reserved.

Page 1

Overall allocations to alternative investments increased among public pension systems over the prior year. The 20% current average allocation is up 2% from an 18% allocation at the end of the prior fiscal year. There is a wide range of alternative allocations among public pension systems. Five of the 97 pension systems report no alternative investments and come from three states, while 11 pension systems from 8 states report alternative allocations above 30%. The composition of alternatives for public pension systems is shown in Exhibit 2.
Exhibit 2: Composition of Alternative Investments among Public Pension Systems
Real Assets 6% % of Hedge Funds 18% Private Equity 45% Real Estate 31% Assets ($ bil) Private Equity Real Estate Hedge Funds Real Assets $189 $132 $74 $25 $421 Total Assets 9% 6% 3% 1% 20% % of Alternative Assets 45% 31% 18% 6% 100%

Private equity and real estate together comprise three-quarters of current public pension allocations to alternatives, followed by an 18% allocation to hedge funds and a 6% allocation to real assets. Underlying these allocations is a shift out of real estate and into hedge funds and real assets. Hedge funds currently represent 3% of total public pension assets and 18% of alternative assets. Those figures are up from 2% and 15%, respectively, in fiscal 2009. On the other hand, current real estate allocations equal to 6% of total assets and 31% of alternatives represent a year-overyear drop from 7% and 38%, respectively. Independent industry surveys suggest that overall allocations to alternatives will increase and new allocations will be focused on hedge funds and real assets.4

Corporate Pensions5
U.S. corporate defined benefit pension plan assets total approximately one trillion dollars and exhibit some of the same trends found in public defined benefit pension plans. Allocations to alternative assets are increasing, but at levels below public pension systems. The average weighting to alternatives equals 14%, which is below the 20% average allocation for public pension plans. It is very likely that corporate downsizing of defined benefit plans is contributing to the smaller alternatives allocations as these plans become more mature with greater benefit payouts.

4 5

Source: Greenwich Associates; Prequin; Casey Quirk. Source: Greenwich Associates 2010 Report Page 2 of 3

Allocations to Alternative Investments 2011 Cliffwater LLC. All rights reserved.

The makeup of alternative allocations among corporate pension plans is different from public plans. Hedge funds represent 5% of total corporate pension assets and 39% of total alternatives, well above the 3% and 18% allocations for public plans. The higher corporate allocations to hedge funds come at the expense of real estate which represents just 3% of total corporate plan assets. Corporate pension plan allocations to alternatives rose 1% over the past two years with hedge funds representing all of the increase. We might expect this trend to continue among liquidity minded corporate pension plans as hedge funds provide more flexibility than private equity and real estate.

Endowments6
Endowments were early adaptors of alternative asset classes and their high allocations largely reflect that history. Today, alternatives equal 52% of endowment assets measured by dollarweighting and 26% of endowment assets measured by equal-weighting. The large disparity between dollar and equal weighted values is caused by very high allocations to alternatives among a small number of universities that represent a large fraction of total endowment assets. Nonetheless, by either measure endowments are by far the largest percentage allocator to alternatives, if not by dollar amount due to their smaller asset base. Hedge funds command the largest fraction of endowment alternative assets, representing 41% of alternatives and 21% of total endowment assets. Furthermore, hedge funds have the greatest weight of all asset classes used by endowments. Private equity represents the second largest slice of alternatives at 35%, followed by real assets at 14% and real estate at 10%. It is unlikely that the high current endowment allocation to alternatives is intended. The 2008 financial crisis left many endowments in a liquidity squeeze which caused them to sell from traditional asset classes to meet spending needs because they could not liquidate private equity and real estate investments. Before 2008, endowments had a 37% allocation to alternatives and the 52% current level most probably reflects a 15% drop in overall assets coupled with an inability to liquidate private investments. Consequently, it would not be surprising to find allocations to alternatives, particularly private equity and real estate, to fall as a percentage of endowment assets over the next several years. The likely slowing of investments in alternatives or, in some cases, divesting is already providing some opportunities for public and corporate pension plans to gain access to top tier managers that historically relied upon endowments for capital. Stephen L. Nesbitt snesbitt@cliffwater.com April 4, 2011

Cliffwater is a service mark of Cliffwater LLC.

The views expressed herein are the views of Cliffwater only through the date of this report and are subject to change based on market or other conditions. All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. This report is being distributed for informational purposes only and should not be considered investment advice. The information we provide does not take into account any investors particular investment objectives, strategies, tax status or investment horizon. Past performance does not guarantee future performance.

Data referenced for endowments come from the 2010 NACUBO-Commonfund Study of Endowments. Page 3 of 3

Allocations to Alternative Investments 2011 Cliffwater LLC. All rights reserved.

Appendix: Fiscal 2010 Alternative Investment Allocations among State-wide Pension Plans
Total Assets ($mil)*
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97

% % Private + Alternatives = Equity 61.3% 53.6% 42.0% 40.7% 34.7% 33.7% 33.0% 32.1% 31.5% 30.2% 29.9% 29.9% 29.7% 29.5% 28.1% 28.0% 28.0% 27.8% 27.0% 26.5% 26.3% 25.7% 25.6% 25.5% 25.2% 24.5% 24.5% 23.7% 23.4% 22.7% 21.9% 21.9% 21.2% 20.9% 20.8% 20.5% 19.8% 19.7% 19.2% 19.1% 18.9% 18.6% 18.5% 17.8% 17.8% 17.5% 17.1% 16.8% 16.6% 16.5% 16.0% 16.0% 16.0% 15.9% 15.9% 15.0% 15.0% 15.3% 15.3% 14.7% 14.5% 14.0% 13.6% 13.4% 12.5% 11.9% 11.6% 11.6% 11.6% 11.4% 11.4% 11.3% 10.8% 10.7% 10.2% 9.4% 9.1% 8.4% 7.8% 7.3% 7.3% 7.2% 6.7% 6.5% 6.1% 5.2% 5.0% 5.0% 4.9% 3.1% 1.2% 0.2% 0.0% 0.0% 0.0% 0.0% 0.0% $427,918 19.9% 23.5% 9.8% 25.8% 20.4% 7.4% 9.5% 9.4% 21.0% 10.6% 9.8% 9.8% 19.0% 18.3% 19.1% 15.9% 5.0% 5.0% 8.8% 9.2% 14.1% 3.6% 14.8% 11.3% 11.1% 8.2% 8.2% 9.0% 18.5% 15.7% 8.8% 3.2% 9.0% 4.5% 4.5% 12.7% 7.8% 9.5% 7.8% 0.3% 7.0% 11.3% 13.3% 4.3% 2.6% 9.6% 8.4% 9.7% 11.3% 3.4% 11.0% 6.0% 6.8% 7.9% 13.7% 5.0%

% Real Estate 8.7% 14.2% 9.1% 14.7% 10.4% 12.7% 9.1% 9.1% +

% Hedge Funds* 22.7% 28.0% 0.8% 11.2% 12.7% 3.9% 11% 2.0% 7.7% 5.1% 5.1% 1.6% 2.2% 1.8% 7.7% 10.0% 10.0% 13.3% 8.6% 3% 19.0% 0.9% 3.3% 4.9% 14.1% 8.2% 8.2% 9% 0.0% 9.7% 6.6% 4.2% 11.3% 11.2% 11.5% 1% 10.9% 12.8% 1% 3% 12.9% 12.9% 4.8% 2.9% 2.6% +

% Real Assets** 6.4% 15.8% 1.2%

Pennsylvania State Employees' MOSERS Washington State Inv Board Pennsylvania Public Schools Utah Retirement Systems Illinois Teachers MPERS (MoDOT & Patrol ERS) Oregon PERS Mass PRIT/PRIM Alaska TRS Alaska PERS Michigan State Police RS Michigan SERS Michigan Public School Employees NM Permanent Fund (SIC)-Severence Illinois Judges Illinois SERS New Mexico ERB Ohio School Employees RS CalPERS TCDRS CalStrs Delaware PERS South Dakota RS Louisiana State Employees' RS Indiana PERS* Indiana Police & Fire* Virginia Retirement Systems Louisiana TRS Iowa Fire & Police Land Grant - NM Permanent Fund Alaska Permanent Fund Texas TRS Missouri Public School RS Missouri Public Education ERS Iowa PERS West Virginia PERS Michigan Municipal ERS West Virginia TRS Vermont Municipal Employees' Ohio STRS Coloarado Fire and Police DC Retirement Board South Carolina RS New Mexico PERA Colorado PERA Indiana Teachers NY State Common Montana PERS Maryland State RPS Minnesota SRS - SERF Montana TRS Wisconsin RS (SWIB) Core Fund Arkansas TRS NY State Teachers RS (NYSTRS) Kentucky ERS Pension Fund North Dakota Teachers' Fund Minnesota SRS - PERF Minnesota SRS - Police & Fire Florida Retirement System Connecticut Teachers RS Minnesota SRS - Teachers RF Rhode Island ERS (ERS, TRS) Arkansas PERS Connecticut State ERS Missouri Local Government ERS Hawaii ERS New Jersey PERS Alabama ERS Alabama TRS Connecticut Municipal ERS Kansas PERS Idaho PERS North Carolina RS Ohio PERS Ohio Police & Fire North Dakota PERS Vermont State Employees' New Hampshire RS Nevada PERS Louisiana School ERS Illinois Municipal Wyoming RS Arizona State Retirement Nebraska DB Plans Mississippi PERS Kentucky TRS Tennessee Consolidated RS Maine PERS Texas ERS Alabama JRF Vermont State Teachers' RS Georgia ERS Georgia TRS Oklahoma PERS Oklahoma Teachers' RS Texas Municipal RS Totals

$24,436 $6,225 $52,631 $46,282 $19,058 $31,482 $1,217 $49,554 $41,284 $2,715 $5,382 $1,000 $8,920 $36,438 $3,797 $8,684 $8,201 $8,179 $9,049 $203,753 $17,600 $129,961 $6,362 $6,563 $7,961 $7,780 $3,013 $47,924 $11,741 $1,542 $10,212 $33,255 $94,125 $21,502 $2,105 $19,856 $3,244 $5,321 $3,513 $321 $58,774 $2,832 $3,743 $19,812 $10,150 $32,907 $4,236 $132,500 $2,988 $28,500 $6,755 $2,278 $62,306 $9,050 $75,458 $10,469 $1,418 $10,153 $3,956 $109,344 $13,864 $13,820 $6,069 $4,720 $8,789 $3,199 $10,583 $62,923 $7,972 $16,614 $1,506 $11,232 $10,528 $45,877 $68,562 $10,542 $1,509 $1,160 $4,841 $20,900 $1,251 $22,348 $5,707 $23,354 $6,222 $16,788 $12,679 $27,911 $9,226 $18,097 $219 $1,298 $10,646 $45,634 $6,540 $9,116 $14,472 $2,146,532

9.9%

4.1% 15.3% 15.1%

9.3% 9.2% 8.6% 4.5% 10.0% 10.0% 4.9% 9.2% 7.4% 3.7% 10.0% 9.3% 8.2% 8.2% 6.0% 4.9% 7.0% 3.4% 10.4% 2.0% 5.1% 5.1% 7.8% 0.5% 6.3% 0.5% 4.0% 11.3% 4.1% 5.2% 0.6% 1.6% 6.0% 3.9% 4.2% 5.3% 6.1% 5.0% 6.0% 6.2% 7.5% 0.6% 10.0%

3.0% 3.0% 0.8% 2.5%

1.7% 6.0%

3.4% 2.0%

0.7% 1.9%

4.4%

4.0% 2.9% 0.4% 0.7%

4.1% 8.5% 9.5% 8.6% 2.8% 3.3% 4.8%

6.5% 4.1% 4.1% 5.4% 2.0% 6.9% 2.5% 11.6% 11.4% 3.3% 7.9% 3.1% 4.5% 5.4% 6.0% 4.9% 3.6% 5.1% 4.5% 4.5% 1.8% 5.2% 3.1% 3.8% 4.6% 3.3% 5.0% 3.7% 1.2% 0.2%

4.1% 1.9%

8.0% 1.9% 2% 4.3% 7.2% 1.4%

8.1% 3.4% 7.7% 5.1% 3.7% 3.4% 4.2% 0.2% 1.9% 2.8% 2.8% 3.5% 2.1% 2.3% 0.5% 0.9% 0.1%

0.0%

1% 1%

4.6% 1%

1% 2% 1.3% 0.1%

0.6%

0.8% 1.1%

$189,313 9.0%

$132,349 6.3%

$74,243 3.5%

$24,859 1.2%

* Hedge funds invested within traditional asset classes are included. ** includes timber, oil&gas, infrastructure, and commodities

Appendix to Cliffwater Research Report: Allocations to Alternative Investments, 2011Survey

2011 Cliffwater LLC. All rights reserved.