Some multibillion-dollar pension funds depend on hedge funds

Pension plans investing over 60% in stocks had the highest real returns in 2024

In order to ensure that retirees received all the retirement funds a company or other institution may have promised them, pensions were often limited to investing in run-of-the-mill assets like government securities, investment-grade bonds, and blue-chip stocks. But as market conditions have evolved, pensions are increasingly being invested in a wider range of assets, including alternative investments.

401(k) plans and pensions differ in who has control over the investments

With pension plans, a company contributes to an investment fund from which it distributes regular payments to a retired worker until their death. A 401(k) gives the worker control over contributions in a tax-advantaged account.

Pension funds' allocations to risky, alternative investments increased by 25% between 2001 and 2021

The portion of pension funds' risky investments, including alternative investments such as private equity, increased from 14% in 2001 to 39% in 2021. Analysts say private equity investments have delivered higher returns than traditional assets like stocks and bonds. Increased investment in private equity has also given pensions a way to recover from the 2008 financial crisis without necessarily investing more money.

The prevalence of 401(k) plans and IRAs over pensions shifted investment risk from employers to employees.

US pension plan adoption has declined from 1975 to 2021

Pension plans are a form of guaranteed retirement plan for long-time workers, and they were a major part of industries in the mid-20th century. With the rise of the 401(k) and similar tax-advantaged, defined-contribution accounts, these so-called defined-benefit plans have declined in use by employers. Compare US adoption of both kinds in this table.

Only half of American workers have retirement accounts, like 401(k) plans, through their current jobs.

State governments have public pensions for their employees

In many US states, these pensions are set aside for teachers, firefighters, and/or other state government workers. However, many of these pensions are currently underfunded. This map provides a visual representation of how strong each US states’ public pensions are.

Most pensions are subject to federal income taxes

Those taxes kick in once someone starts taking distributions from their pension. Whether a pension is subject to state income taxes depends on the state and other factors. Learn more about how pensions are taxed in this article.

Technically speaking, a 401(k) is a type of pension

The Employee Retirement Income Security Act of 1974 lumped both defined-contribution plans like 401(k) plans, and defined benefit plans (like what is colloquially known as a pension) under the term “pension” in order to protect workers and make retirement plan enforcement simpler. Learn more about the ERISA here.

Hedge funds make money from imposing steep fees on investors, as well as from investment performance

Hedge funds often operate on a "2 and 20" model: Investors pay fund managers a 2% management fee, and the hedge fund keeps 20% of their profits. (The 2% is imposed annually, irrespective of performance.) Hedge funds are known for chasing big returns—and taking big risks to get them. This explainer not only breaks down how they work in detail, but also the strategy first introduced in 1949 that still shapes hedge fund investing today.

Pensions often must ‘vest’ for an employee to be eligible for them

This means that often, an employee won’t be eligible to receive a full pension benefit from an employer until they have worked at the job for a certain number of years. Specifically, these vesting schedules determine when one owns their employer’s pension contributions. The number of years varies significantly by employer.

Explore the differences between private equity, venture capital, and hedge funds

Private equity firms focus on buying and improving private companies with the intent to sell them for profit or take them public. Venture capital is technically a form of private equity in which investors focus on startups and generally don't seek majority control of the company. Hedge funds are pooled investments for sophisticated investors that pursue a wide range of often complex strategies.

Many hedge funds use short selling as an alternative investment strategy to offset risk

Hedge funds typically use a "long-short" investment strategy—where funds diversify by investing in a mix of long positions and short positions—to balance risk and maximize profits. Including short positions gives hedge funds some protection against downturns in the market, although the strategy can have uncapped losses for investors.

When a pension holder dies, payments are sometimes passed on to a relative

Those relatives are often the pension holder’s surviving spouses or dependents. This article offers tips from a financial expert on how to make sure your spouse is taken care of during retirement, including navigating a pension’s ultimate destination.

Cash balance pension plans provide the option of a lifetime annuity

Specifically, these defined-benefit plans are retirement plans that differ from traditional pensions in that they can come in one lump sum rather than in monthly payments. These plans are most popular among small business owners and their employees. Learn more about them in this article.

A hedge funds timeline, from the 1940s onward

Since Alfred Winslow Jones formed the first hedge fund in 1949, traders have rolled out an increasingly complex array of investment strategies. They all aim to beat increasingly efficient markets and/or to provide ample downside protection against sell-offs.

The majority of capital in private equity funds is provided by institutional investors

The individuals who invest this initial capital are called the firm's limited partners. Private equity firm LPs include sovereign wealth funds, university endowments, high-net-worth individuals, and more.

IRAs and 401(k) plans both help individuals save for retirement, but have their differences

Anyone can open an IRA, but 401(k) plans are accessible only through an employer. These two retirement vehicles also have different contribution limits per year, with 401(k) plans allowing you to contribute significantly more than an IRA.

In the early 2000s, Warren Buffett invested $1M in an index fund to show that passively managed investments would outperform hedge funds—making the point that actively managed funds are not worth the management fees they charge.

The 401(k) is limited in its ability to provide guaranteed retirement income

Part of the problem is the high, often hidden fees associated with the accounts and a lack of access. Plus, analysts say the annual cost in tax revenue to the government is more than $100B.

Roughly 70 million Americans have 401(k) plans

Ted Benna, a rural benefits consultant, proposed a reinterpretation of a small tweak to the Internal Revenue Code in 1980. This led to a fundamental transformation of how American workers plan for retirement.

Investing in mutual funds can give you access to a wide range of securities, such as stocks and bonds, with just a single investment.

How to put on a hedge

These days, hedging your portfolio isn’t just for hedge fund managers. An explainer from Robinhood delves into what a hedged position actually is, why traders put on hedges, and how you, too, can work to guard your holdings against a market downturn. The idea is to derive gains from your portfolio when markets are trending up, down, or sideways.

People often invest in alternative investments to diversify their portfolios

Because alternatives often have little correlation with traditional investments like stocks and bonds, adding them to a traditional portfolio can reduce its overall risk exposure.

90 percent of active managers of large public funds underperform

High fees tend to eat away at whatever edge professional managers accrue, resulting in most such funds performing worse than their underlying benchmark indexes like the S&P 500.

The world’s top 10 hedge funds

The world’s top 10 hedge funds based on total assets under management include Ray Dalio’s Bridgewater Associates and Citadel.

Mutual funds are categorized as stock, bond, money market, and target-date funds.

Fees can eat away at your 401(k)

Every investment plan has an expense ratio—a percentage of the total assets that goes to the investment manager in the form of fees. Because 401(k) plans are so common, and many of their participants are not savvy investors, the relative expense ratio for them has often excessively increased.

A 401(k) plan allows workers to save for retirement without paying taxes until later

With a 401(k) plans you can invest more money now and let it grow with compound interest. Americans have more than $7T invested in these types of accounts.

Mutual funds pool money to create larger investment opportunities with higher returns for anyone who initially invests in the fund.

Retail investors are getting burned by long/short strategies

In the US, many retail investors lack the SEC-mandated status (a high enough net worth, income, and other factors) to directly invest in hedge funds. The regulator considers hedge funds too risky for the masses. Hedge fund-like strategies have emerged as a workaround, despite potential pitfalls.

The financial crisis in 2008 had a major impact on many 401(k) plans

Amid the 2008 financial crisis, stocks and bonds cratered as the broader market floundered due to the subprime mortgage crisis. Investors with so-called "target-date" funds—which shift allocations based on the maturation of a fund—shared in the slump, with some funds declining by 20% or more just a year or two away from maturation.

The 'Big Three' asset managers—Vanguard, State Street, and BlackRock—collectively manage more than $30T in assets and are the largest shareholders in roughly 88% of all the companies listed on the S&P 500.

The median trust fund contains roughly $285K

That’s according to data from the US Federal Reserve. There isn’t a specific net worth that can help determine whether or not someone needs a trust—but contrary to popular belief, trust funds can be great estate planning tools, even for people who aren’t ultra-wealthy.

The 'Two and Twenty' structure allows hedge funds and private equity firms to earn significant returns

With this structure, firms charge limited partners or "LPs" a 2% management fee for overseeing the fund (assets under management or AUM) and take 20% of the fund's overall profits (carried interest). Many private credit funds also operate under this structure.

Before Social Security, elderly Americans relied on family support, limited state pensions, or company-sponsored pensions

Before Social Security benefits were available to American retirees, they had to find other ways to get by. Pensions were only available to roughly 15% of workers, and most elderly Americans went without meaningful economic security.

401(k) plans had an average of $112K as of 2023

The median, however, is much lower at around $27K. The average balance of a 401(k) in the US differs across different age groups and income levels.

The average gig worker likely doesn’t have an employer-sponsored retirement plan

But just like full-time 9 to 5 office workers, gig workers can still save for retirement. An article outlines strategies for gig workers seeking to save for retirement, including different ways to think about what the money from each “gig” should go toward.

Because of their size, sovereign wealth funds create anxiety about foreign undermining of financial systems

Across the board, sovereign wealth funds have an immense amount of capital, and, therefore, influence in global financial markets. Critics argue that this influence could enable a foreign country to harm another country's financial market by either investing adversely in competitive markets or by withholding critical capital.

How ‘vulture’ hedge funds make money

Some hedge funds specialize in snapping up distressed assets, like failing newspaper chains, and further stripping down their operational expenses in a bid to make a profit from the initial capital outlay. Delve into how one secretive firm known for the practice operates—and what’s at stake for the broader economy.

Researchers, experts, and retirees are finding that the 401(k) has left much to be desired

Baby Boomers, once the biggest generation, are now creating the largest wave of retirees in US history. Much of this generation is also the first to retire predominantly on the expectation that their 401(k) plans or similar tax-advantaged accounts performed well in the markets—which isn’t always the case.

Explore an alternative investments timeline

From what’s known as the first leveraged buyout, when JPMorgan acquired the Carnegie Steel Company, to the creation of the first-ever hedge fund, alternative investments have a long history.

Nearly half of billionaires planned to increase exposure to direct private equity investments in 2026.

Some politicians have argued that Social Security should be privatized

Specifically, some assert that diverting funds into self-directed retirement accounts should replace Social Security taxes and benefits to some extent in a privatized retirement savings system. This article details the pros and cons of privatizing Social Security.

Some institutional investors are growing wary of private equity, as certain investments underperform traditional market indices

Private equity often attracts investors who can afford to tie up capital for long periods of time in exchange for higher returns than traditional investments. For many years, private equity at least tracked with the S&P 500 in terms of returns to investors, but in 2024 and 2025, it underperformed and posted declining returns.

Mutual funds invest in multiple different companies with money from many investors, while an individual stock represents ownership in a single company and is bought by individual investors.

About 98% of companies offering employees a 401(k) plan match employee contributions

Broadly speaking, an employer 401(k) match means that if you invest money into your 401(k), your employer will put cash in, too. But these programs are often fairly nuanced.

How mutual funds work

Mutual funds function similarly to other types of investments. If you want to invest, you go through a brokerage firm. However, they have a few key differentiators. Most are actively managed by a broker instead of passively earning you returns. Plus, they can carry some hefty fees.

Having two retirement accounts has its pros and cons

Contributing to both an IRA and a 401(k) lets you increase your retirement savings by about 30% every year. However, you’ll also spend more time actively investing that money and pay more in fees.

A basic guide to retirement savings account options, the IRA and the 401(k)

The two main types of accounts are 401(k) plans and individual retirement accounts (IRAs)—but what do those mean, exactly? There are differences between the two types, as well as the subtypes beneath them.