Hedge funds still pack a punch for pensions

Lane, Clark and Peacock said that while trustees were disappointed with hedge fund returns, slumping equity markets meant many schemes were still looking to diversify their portfolios and many were only just starting to invest in hedge funds.

The comments come as the $1.7 trillion (£1.2tn) hedge fund industry suffers a dreary performance in highly volatile markets. In the first ten months of 2008, funds have fallen by just over 16 per cent, according to Hedge Fund Research. The FTSE 100 index fell 32.2 per cent over the same period.

LCP investment partner Clay Lambiotte said: "I can certainly see pension funds continuing to increase allocations to hedge funds … In our view the case hasn't been fundamentally damaged by what's happened.

"Twice in the last decade equities have just demolished portfolios. The idea of diversification is very much at the forefront of investment strategy … A lot of pension funds are just getting started and are just putting hedge funds on the radar screen."

Lambiotte said a number of pension funds had put on hold investments into hedge funds until turbulence in the hedge fund sector, which is bracing itself for heavy end-of-year redemptions, calms down.

But he added: "We haven't seen a rush for the exit. Obviously pension trustees are disappointed – they thought that in times just like these hedge funds were meant to protect capital and obviously we've not seen that.

Lambiotte forecast some pressure on hedge fund fees, which have typically been a 2 per cent annual management charge and 20 per cent performance fee.