It's hard to believe, but public pension funds placed only 3.6 percent of their portfolios in hedge funds in 2010, according to Greenwich Associates. That compares with 1.7 percent in 2008. But allocations to hedge funds are bound to rise.

The New York City Police Pension Fund, for example, has generated some headlines for its initial foray into this asset class. It will become the first New York City pension fund to invest in hedge funds. And it may not be the last.

The truth is that a lot of pensions are facing some shortfalls when they gauge their obligations to pensioners. Many face the cringing need to jack up their returns, which makes alternative investments, despite the poor press during the financial crisis, look relatively attractive.

Dow Jones notes that many pensions' allocations have "traditionally been skewed towards fixed-income instruments like U.S. Treasuries and long-only investments in equities. But those assets' prospects in the near term don't look especially promising."

So, the market seems to be moving toward alternatives like hedge funds, especially the multi-manager, multi-asset type. This bodes well for the industry, especially larger, more established funds.

The number of hedge funds managing at least $1 billion rose to 225 in 2010 from 213 in 2009. Total industry assets rose 10 percent to $1.3 trillion last year, compared with $1.7 trillion in 2008. Pension trends will likely fuel the continuing boom as they are forced to boost their allocations.

For more:
- here's the Dow Jones article

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