Pension schemes set to up hedge fund exposure-LCP

By Laurence Fletcher

LONDON (Reuters) - Pension funds are likely to continue raising allocations to hedge funds over the longer term, despite disappointing performance this year, pensions consultant Lane, Clark and Peacock LCP.L said.

While trustees are 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, LCP Investment Partner Clay Lambiotte said.

His comments come as the $1.7 trillion (£1.14 trillion) hedge fund industry posts record poor performance in highly volatile markets.

In the first ten months of 2008, funds have fallen 16.05 percent, according to Hedge Fund Research, disappointing some investors who had expected positive returns in all markets.

The FTSE 100 .FTSE fell 32.2 percent over the same period.

"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," Lambiotte told Reuters in an interview on Thursday.

"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 said schemes had not been selling wholesale out of the asset class.

"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.

"There's certainly scope for some to increase investment, though it does depend on how it plays out in the regulatory environment and how bad redemptions are."

Earlier this week, Austrian multi-sector pension scheme APK Pensionskasse said it had put on hold plans to more than double exposure to hedge funds and private equity.

Lambiotte added that there would be pressure on hedge fund fees, which have typically been a 2 percent annual management charge and 20 percent performance fee.

"It does call into question what they're doing and how they operate and ... probably clients will be less willing to pay those sort of fees," he said.

(Editing by Andrew Macdonald)