Contrast that with alternative assets. So far they’ve delivered returns above APG’s long-term target of 7% to 10%. The firm garnered 18.6% on private-equity holdings since it started investing in the asset class in 2010. Infrastructure generated a 12.7% internal rate of return since 2011.

Exit Window

A BlackRock survey of clients overseeing $7 trillion of assets published in January found just over half planning to increase their allocation to alternative assets this year.

“One of the biggest benefits of alternative assets is its uncorrelated return to the market,” said Anne Valentine Andrews at BlackRock Alternative Investors. “Illiquid assets such as infrastructure investment do not tend to experience the volatility of equities, which is valuable for many investors looking to diversify their portfolios.”

But the rapid dash to alternative assets by the stewards of retirement cash comes with risks, and it’s caught the attention of regulators. They worry that in a downturn funds would struggle to pull cash out of illiquid assets. While pension funds typically hold debt until maturity it doesn’t mean they can’t be hurt by mark-to-market losses.

AIG Bailout

American International Group Inc., which had been the world’s largest insurer, was bailed out in 2009. Its losses on debt backed by defaulting subprime mortgages forced it to post collateral to banks and seek an $85 billion government rescue.

“It’s all about timing the cycle,” said Hentov at State Street, who’s presenting his research on private-debt investments at the IMF’s annual meetings this month. “You don’t want to be the big pensions fund invested in illiquid assets without a spreadable exit window.”

At PGIM Fixed Income, which oversees $809 billion, senior portfolio manager Michael Collins said one of his biggest overweight positions is in structured debt such as collateralized loan obligations -- securities pooling high-yield loans made to targets of leveraged buyouts. The Total Return Bond Fund he helps manage has put 20% of its holdings into securitized debt and outperformed 95% of peers over the past year, according to Bloomberg data.

But Collins is sticking with the top-rated pieces of CLOs which are more liquid and last to absorb losses from defaulting loans.