A lot of institutions got burned in the hedge fund pyrotechnics that flowed from the financial crisis. But pensions are as interested as ever in investing in hedge funds specifically and alternatives generically. Agecroft Partners predicts that pension plans will significantly increase their exposure to mid-sized hedge funds over the next 10 years.

A decade ago, the average pension plan allocation to hedge funds was less than 1 percent; very few corporate pension plans invested. It wasn't until 2001 that CALPERS became the first public pension to invest directly in hedge funds. Since then the allocation average has risen, a trend that will likely continue.

The fact is that hedge funds have outperformed relevant long only indexes, and pensions face some scary needs when it comes to future liabilities. They need performance now in the worst way, and they know it.

The danger here is that pensions over-cook the pot. They need to be disciplined about correlation and diversification and good old fashioned fund picking.

New Jersey raised some brows recently when it was reported that one of its consultants recommended it jack its allocation to hedge funds to 43 percent vs. the maximum allowable 19.3 percent. That may seem absurdly high, but remember that endowments have about 50 percent allocated to hedge funds. The pressure to generate returns is only growing. 

For more:
- here's an article on New Jersey from aiCIO

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