Pension funds have increased their allocation to hedge funds from 3.6% to 6.6% between 2007 and 2011, according to the latest survey by research company Preqin.

The number of public pension systems investing in hedge funds has increased significantly over the past four years. There are now 295 public pension plans worldwide known to be allocating to hedge funds, up from 196 in 2007. With a mean allocation of 6.6%, pension funds now invest 1% more in hedge funds, then they averagely do in private equity.

Four-fifths of public pension systems that made their first hedge fund investments in 2010 did so through multi-manager allocations, while 70% of all hedge fund investments have funds of funds commitments in their portfolios. The research also showed that hedge funds have outperformed public pension funds’ average return expectations of 6.15% by producing average returns of 9.8%.

Amy Bensted, manager at Hedge Fund Data, commented: “Public pension funds are one of the most influential groups of investors, and their increased uptake of hedge funds is shaping the new institutional era of hedge fund management. Pension funds have realistic return expectations, and as they gain more experience of the asset class, there has been a fundamental shift in these investors towards allocating to hedge funds for capital preservation and portfolio diversification.”

Institutional investors make up 70% of Stenham Asset Management’s client base, and Stenham’s director, Harry Wulfsohn, said that they have also seen pension funds increasing their allocation to hedge funds.

He said: “Pension funds have been through two significant bear markets in the last 10 years where equities halved twice, so now they are more aggressively diversifying away from equities. Because of that, there is significant growth for all alternative asset classes, and hedge funds and fund-of-funds form a very large part of that.”

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