Value Added From Money Managers in Private Markets? An Examination of Pension Fund Investments in Real Estate∗

Real estate is the most important alternative asset class for pension funds and represents on average more than five percent of their total holdings. We employ a previously unexplored international database to examine the investments of some 880 pension funds in direct real estate and REITs over the 1990-2009 period. We document that larger funds are more likely to invest in real estate internally, have lower costs, and higher returns. Smaller funds are more likely to invest in direct real estate, through external managers and fund-of-funds, but largely ignore REITs. This significantly increases their costs and reduces their returns. Moreover, U.S. pension funds’ investment costs are twice as high as those of their foreign peers, and their gross and net performance is lower. The underperformance of U.S. pension funds in real estate investments is most striking in the last two years of the sample period, which may be due to opportunistic investment behavior pre-crisis. JEL classification: G11, G20, G23.