EUROPE – A new report says pension fund trustees need education about hedge funds amid “extreme unease” about some of the funds’ inherent features.

“In our interviews with pension funds and their consultants, one message came through clearly: trustees need more education and information than they currently have,” the 88-page report from KPMG and the Create think tank states.

“This applies not only to hedge funds, but also to other strategies that drive liability-matched investment and structured products.”

And it found that some of hedge funds’ inherent features, such as leverage and opacity, “give rise to extreme unease on the part of trustees, long used to the traditions of transparency in investment strategies, philosophy and process”.

Hedge funds were “seductive in logic but complex in practice”.

But, despite, this, the report found that the “next wave” of new inflows into hedge funds will come from pension funds.

“The study predicts that the next wave of new money into hedge funds will come from pension funds that have so far adopted a wait and see attitude,” said the firms in a release.

They added that US schemes were likely to have larger hedge fund allocations than those in Europe and Asia.

“Outside North America, pension funds’ investment in hedge funds is less strategic and more opportunistic. More a matter of dipping the toe in the water than diving in deep.”

The report states that hedge funds “carry huge reputational risk” for most pension funds.

“The charges are high, as are the prospects for low returns. Their resistance boils down to investment basics: opaqueness, fees and performance.”

The study found that more than two in three funds believe there is overcapacity risk in hedge funds. And that around one in three believe there is real systemic risk due to the limited arbitrage opportunities. And three in four reckon the multitude of strategies mean accounting purposes.

Such factors were seen as arguing for “greater caution and vigilance”. KPMG surveyed 550 hedge fund executives.

Meanwhile, Mercer Investment Consulting said pension fund trustees would increase their alternative asset allocations “as their comfort levels increase”.

It said it has surveyed schemes and found that the number investing in hedge funds was expected to rise from 5% to around 12%.

Interest in private equity was likely to rise from 4% to 9% of schemes. And active currency management was predicted to rise from 6% to some 10% of schemes. Tactical asset allocation was likely to increase from 5% to 8%.

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