Most people assume that in the Dodd-Frank era, large hedge fund companies have a leg up, given their ability to invest in compliance programs and their more established track records. But the need for returns is so great that we'll likely see more pensions--public and private--allocate more to smaller funds of all stripes, even funds of seed funds, notes Pensions & Investments.

The idea is that smaller hedge funds have outperformed their larger brethren over the last 15 years, and if there's one thing that pensions need, it's performance.

The California Public Employees' Retirement System (CalPERS) and the New Jersey Division of Investment are leading the movement, which is opening up some interesting opportunities. One corporate pension invested $150 million in a fund of funds that invests in emerging minority- and woman-owned hedge fund companies.

Some are pondering revenue-sharing arrangements with smaller fund companies. An equity stake in a young hedge fund company allows for profit sharing that provides another income stream or at least a chance to offset fees.

So maybe we're at an inflection point. Maybe big institutions are less worried about the regulatory climate and are back to focusing on returns. And most would agree than nimble, smaller-sized hedge funds might have the best chance at outsized returns.

The most attractive offering may be a small hedge fund company that combines a strong front-end program with a strong back-office and a compliance program that can instill confidence.

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