The funding situation puts systems under a great deal of pressure to reach for higher returns by investing in riskier assets. But as has been so clearly and forcefully demonstrated over the past year, there is no free lunch with risk-taking: The price is volatility, the extent of which should be well disclosed and the implications of which should be well understood.
The generally high weight on equity and real estate investments in the typical public pension fund portfolio has increased in recent years. Part of that exposure has come from increased  BIS Review 64/2008  5  investment in private equity, real estate investment trusts, and hedge funds. Indeed, some funds have allocated 25 percent or more of their portfolios to these "alternative" categories.