Recent economic woes have left public pensions in quite a mess. Their assets continue to lag expected liabilities, and that has all of them quite nervous--and under pressure. For future pensioners, this is not a great situation. Nothing would be more disastrous for them than desperate managers who make unwise moves in their hunt for higher returns.

No one can blame pensions for rushing into alternative investments. This year, more than $70 billion has flowed into hedge funds, mainly from big institutions. Surveys have shown pensions remain hungry for these investments, though they do not represent a panacea by any stretch of the imagination. Unfortunately, the long-term return that pensions can expect is no great shakes. The average hedge fund investor earned about 6 percent annually from 1980 to 2008. That compares with a 5.6 percent return from Treasury securities, according to a recent study noted by the New York Times.

While past performance is no guarantee of future returns, most pensions now assume an 8 percent return over the long-term. That may be wildly optimistic. So what are they doing? Breakingviews notes that some are pondering using leverage.

"One strategy making the rounds would shift funds out of the usual stock allocation of just over 50 percent and into a new bucket of supposedly safe fixed income assets. Managers would then lever up this allocation, borrowing say $3 for every dollar of the fund's money to buy more assets and thereby turbo-charge returns. If they treated half their equity allocation in this manner, they might get to 8 percent annually."

But that amounts to a massive bet on highly rated bonds. And if recent events have shown anything, they've shown that such bonds can be very risky. It would be likely be too risk for most pensions. A better route would be to seek additional contributions once the economy fully recovers.

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