Do State Pension Investments Generate Positive Alphas?

Abstract

In our initial analysis of the state pension investment return data set we found that investments outperformed many market indices on both an absolute and risk adjusted basis. Our goal in this paper was to confirm our prior findings using several models including the Capital Asset Pricing Model, Fama French three-factor, and five-factor models and the Carhart four-factor model. We regressed our equal-weighted and weighted-average pension investment return data on each of the models. All our regressions produced positive and significant alphas. We then performed panel regressions using the individual returns from all 85 pension plans in our data set against the same set of models. Again, we found positive and significant alphas using both models. Finally, we employed a bootstrapping procedure to confirm that alphas in our time series regressions were positive and significant. We find that state pension plans do generate positive alphas.