GLOBAL - Underfunding, a lack of transparency and high fees keep the majority of pension funds away from investing in alternatives, according to a new white paper by Northern Trust.

Based on a survey of 300 fund managers and defined benefit (DB) plan sponsors globally, the Chicago-based financial group's paper said that pension funds feel they can better achieve returns by investing in the long-only mainstream asset classes.

The secure approach was the most cost effective way to achieve returns that meet future liabilities, it found. "Before making big allocations to alternatives, investors want to see step improvements in the risk-returns characteristics of investing in alternatives," said Amin Rajan, chief executive of UK think thank CREATE and author of the white paper.

Rajan added: "They also want something done about lack of transparency, high fees and illiquidity in these asset classes."

Hedge funds are particularly unpopular, according to the survey, with one in two pension funds saying they were not in hedge funds and over a third intending to stay out.

Nonetheless, "There is a yawning gap between the aspiration of institutional investors and what they actually do in practice," said Mark Austin, head of multinational client relationships for Europe, Middle East and Africa in Northern Trust's asset servicing group.

Only 10% of the respondents that already invest in hedge funds anticipate a major increase in their allocation, while another 10% are planning to invest over the next three years.

"On average, institutional investors allocate approximately 3% of their cash to alternative asset classes, such as hedge funds, property, private equity and commodities, despite many saying that they want to invest strategically in alternatives to achieve uncorrelated absolute returns," the study argued.

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