Also read: Is fervor for alts slowing?

The one notable exception was the Oklahoma Teachers fund, which was No. 1 on the top-performing public pension list with an annualized 8.8 percent return for the 10-year period ending in June 2013. Cliffwater said the primary contributor to the fund's success was its selection of managers of traditional assets. 

Cliffwater's report suggests that aggressive alternative allocations are required if public funds are to generate the returns necessary to meet obligations to beneficiaries. 

"Traditional portfolios that rely primarily on stocks and bonds produced mid-single digit returns over the last 10 years with uncomfortable levels of volatility," the report said.

And not much is expected to change, notwithstanding consecutive years of double-digit growth and a five-year bull market for equities. Cliffwater said that industry forecasts for returns on stock and bond allocations are 5 to 6 percent, well below the 7.5 to 8 percent returns most pensions need to generate to cover their liabilities. 

All told, state pensions averaged a 7.2 percent annualized return for the 10-year period, exceeding the 6.4 percent that would have been achieved with a traditional 60/40 allocation of stock and bond index funds. 

If the top performers' alt allocations seem aggressive, that's nothing compared to how endowment funds are using alternatives to generate returns. 

As of June 2013, large endowments reported an average of 53 percent allocated to alternatives. 

Endowments outperformed state pension funds over the 10-year period, returning 8.2 percent, compared to 7.2 percent for public funds and 6.3 percent for defined contribution plans. 

For 2013, public fund alternative allocations were broken down as such: 40 percent private equity; 36 percent real estate; 17 percent hedge funds; 7 percent real assets. 

Endowments showed a lot more faith in hedge funds in 2013, allocating 36 percent of their alternative assets in that direction.

Also read: Warning, caution required