(August 12) – Despite similar travails, America’s public pension plans are by no means in agreement on how to work their way out of often massive funding deficits. While some are turning to alternatives investments – often cited as loss-leaders in the recent financial collapse – with aims of boosting returns going forward, others are taking the opposite tack, largely abandoning such investment vehicles.

Recent news emerging from the California Public Employees Retirement System (CalPERS) and the Massachusetts Pension Reserves Investment Management Board (MassPRIM) – two of the nation’s largest pension plans – illustrates this divide. CalPERS, the $189 billion behemoth of American pension investing, has chosen to rebound from a $60 billion loss in 2008 by doubling down on its alternative investments, according to the New York Times. Headed by Joe Dear, formerly of the Washington State Investment Board (WSIB), CalPERS – which is currently only 66% funded – is looking to funnel more money into private equity, hedge funds, junk bonds – and even into the infamously volatile California real estate market. It has raised its alternative allocation to 14%, and Dear – who had a history of large allocations to private equity while at WSIB – is betting that over a longer horizon the risk and illiquidity premiums of such investments will produce a return above the fund’s goal of 7.75% per annum. To cover any calls by private equity firms, CalPERS has correspondingly raised its cash-on-hand to 2% of total assets.

MassPRIM, however, is taking the opposite tack. Holding 5% of its portfolio in hedge funds and 6% in portable alpha the fund has historically been an industry leader with alternatives. The performance of this asset class in fiscal 2008, however, has caused a sea change in the way the fund is now viewing such investments. “We are scrapping portable alpha,” the fund’s Executive Director Michael Travaglini told Reuters in early August. “It is no longer a long-term piece of our investment strategy because of the poor performance.” According to Travaglini, the value of the portable alpha allocation fell by 46% in the year ending June 30. As a result, the Board of Trustees for the $39 billion fund has voted to reduce the absolute return allocation of the portfolio to 8%, a 3% decline from current levels.

The story of these two behemoths is representative of the uncertainty in the industry. While these funds — and the many who follow them will disagree on the best way to limit the difference between assets and liabilities going forward, what’s clear to all is that returns need to rebound in order for shortfalls to be made up. According to a recent study by the National Association of State Retirement Administrators, there was over $443 billion in collective unfunded liabilities – and that was only for the 125 state, local government, and teacher’s pension funds queried.

Whether CalPERS or MassPRIM ends up on the winning side of the alternatives argument will only be known years from now. While they both seem sure of their decisions, uncertainty – the bugbear of institutional investors everywhere – still abounds.

To read more on the need for liquidity at large pension funds, click here .