Texas, North Carolina, California, Pennsylvania and New Jersey have all jumped into alternatives in a big way, with public-sector pension plans now allocating nearly one-quarter of their assets to hedge funds, private equity, real estate and commodities.

Ramped-up state participation has paid off for them but other times it has come back to bite them — like in the case of Pennsylvania, which had 46 percent of its investments in riskier alternatives in 2012 but paid exorbitant fees, which brought its annual return to 3.6 percent, well below its target of 8 percent.

Still, Vern Sumnicht, CEO at iSectors LLC in Appleton, Wisc., a financial services company, said alternatives have become very popular in the public-sector realm in large part because of how successful David Swensen's Yale Model has been in boosting the Yale University Endowment Fund for 15 years.