Target date funds (TDFs) are investment products designed based on the life-cycle theory to provide exposure to risky assets conditional on investors' age. Even though the life-cycle theory does not distinguish between different subcategories of risky assets, in practice, TDFs adopt rigid allocation weights to domestic and foreign equities. To maintain these weights, TDFs implement contrarian rebalancing trades that offset 61.4% of the mechanical allocation changes caused by differences in returns between domestic and foreign equities. TDFs have become major owners of foreign equities and their rebalancing trades have implications for foreign stocks and currencies. TDFs are organized as funds-of-mutual-funds and their holdings account for 10% of the total assets managed by U.S. foreign equity mutual funds in 2022. The growth of TDFs appends the prevalent positive flow-performance sensitivity among mutual funds as foreign equity mutual funds with a higher TDF ownership experience outflows when foreign equity outperforms domestic equity. The returns on foreign stocks with higher TDF ownership co-move more with the U.S. equity market and less with the foreign equity market. On an aggregate level, currencies affected more by TDF rebalancing flows also appreciate more when the U.S. stock market delivers higher returns.

While large regulated incumbents in the energy industry face positive incentives to create new energy-generating assets, we find that market deregulation and capital from the private equity industry and foreign investors have played an outsize role in the adoption of new technologies. Over the 2005--2020 period, domestic publicly listed corporations reduced their ownership of U.S. electric power from 70% to 54% of total generation. Private equity, institutional investors, and foreign publicly listed corporations increased their ownership from 7% to 24%, and as of 2020 owned 60% of wind, 45% of solar, and 28% of natural gas generation capacity. Deregulated electricity markets attract more capital from new entrants to create new plants and acquire existing ones as well as accelerate the decommissioning of coal plants. We find only limited support for the leakage hypothesis that new entrants acquire older fossil-fuel power plants from incumbent domestic listed corporations and keep operating these plants. The changing ownership structure has implications for electricity markets as private equity operates power plants more efficiently at lower heat rates and sells electricity for a $2.21 higher average price per MWh. Within markets of a given regulatory structure, time, and technology, private equity owners sell electricity under contracts with shorter duration, shorter increment pricing, and more peak-term periods, especially when selling electricity generated from fossil fuels.

Pension funds rely on consultants for asset allocation, manager selection, and benchmarking decisions, and have expanded their consultant base by hiring more specialized consultants in alternative assets. We examine the selection and termination of investment consultants. The replacement of general consultants stems from prior relative underperformance, while target asset allocation gaps and board composition influence the hiring of specialized consultants. Replacing general consultants is followed by changes in asset allocation but no significant improvements in pension fund performance. Specialized consultants enable pension funds to scale up the number of investments in private markets as pension funds are more likely to invest in private funds from the consultants' networks. However, specialized consultants do not provide access to rationed private funds, and relying on their services also does not improve performance. The growing concentration of consultants and their influence on asset manager selection by their clients may increase pension fund flow correlations.

We study how portfolio rebalancing needs drive secondary transactions of illiquid stakes in private equity (PE) partnerships. To identify secondary sales of limited partner (LP) interests, we use the return reporting patterns of public investors for funds underlying their portfolio. We find that pensions overallocated in PE tend to sell their stakes in the secondary market, rather than increasing their target allocation or reducing the number of new commitments. The evidence from the distribution of discounts highlights the costs of this denominator effect due to self-imposed portfolio rebalancing policies at public plans.

The return expectations of public pension funds are positively related to cross-sectional differences in past performance. This positive relation operates through the expected risk premium, rather than the expected risk-free rate or inflation rate. Pension funds act on their beliefs and adjust their portfolio composition accordingly. Persistent investment skills, risk-taking, efforts to reduce costly rebalancing, and fiscal incentives from unfunded liabilities cannot fully explain the reliance of expectations on past performance. The results are consistent with extrapolative expectations, as the dependence on past returns is greater when executives have personally experienced longer performance histories with the fund.

Institutional investors can be segmented into investors that hold simple portfolios of traditional equities and bonds, and investors that manage complex strategies in public and private markets. Investors implementing active portfolio management and holding diversified portfolios of equities and bonds are more likely to invest in alternative asset classes. The performance of institutional investors in alternative assets is significantly lower than in equities, suggesting that investors accept lower returns in exchange for diversification benefits. Institutions delegate 90% of their alternative investments to external managers and funds-of-funds. These intermediaries capture large part of the potential diversification benefits through higher fees and lower returns.

Institutional investors expect infrastructure to deliver long-term stable returns but gain exposure to infrastructure predominantly through finite-horizon closed private funds. The cash flows delivered by infrastructure funds display similar volatility and cyclicality as other private equity investments, and their performance depends similarly on quick deal exits. Despite weak risk-adjusted performance and failure to match the supposed characteristics of infrastructure assets, closed funds have received more commitments over time, particularly from public investors. Public institutional investors perform worse than private institutional investors, and ESG preferences and regulations explain 25-40% of their increased allocation to infrastructure and 30% of their underperformance.

Representation on pension fund boards by state officials—often determined by statute decades past—is negatively related to the performance of private equity investments made by the pension fund, despite state officials’ relatively strong financial education and experience. Their underperformance appears to be partly driven by poor investment decisions consistent with political expediency, and is also positively related to political contributions from the finance industry. Boards dominated by elected rank‐and‐file plan participants also underperform, but to a smaller extent and due to these trustees’ lesser financial experience.

The unique regulation of U.S. public pension funds links their liability discount rate to the expected return on assets, which gives them incentives to invest more in risky assets in order to report a better funding status. Comparing public and private pension funds in the U.S., Canada, and Europe, we find that U.S. public pension funds act on their regulatory incentives. U.S. public pension funds with a higher level of underfunding per participant, as well as funds with more politicians and elected plan participants serving on the board, take more risk and use higher discount rates. The increased risk-taking by U.S. public funds is negatively related to their performance.