Pension funds are poised to significantly increase their hedge fund investments as they anticipate strong growth and attractive risk-adjusted returns, although, concerns over transparency could lead some to shy away from certain strategies, according to a report by Funds Europe.

The report cites a recent study by Beacon Platform, which surveyed 33 pension funds across the US, UK, Germany, Switzerland, France, Italy, Hong Kong, and Singapore, reas revealing that 88% of respondents expect the hedge fund industry to add over $190bn in assets this year. Notably, 27% foresee an increase of between $250bn and $500bn.

The study highlights that all the pension funds surveyed view hedge fund investments as appealing in terms of risk-adjusted returns over the next five years, with 15% describing these investments as “very attractive.” This optimism is fuelling expectations for a substantial allocation increase, despite current market volatility.

A significant proportion of pension funds (88%) though, believe that the quality of information and transparency within the hedge fund sector needs to improve, with 27% indicating that improvement is needed “dramatically.” This demand for better reporting and transparency is impacting investment decisions with 91% of the respondents admitting to passing on a hedge fund investment due to concerns about risk management, and 94% anticipating this trend will grow in the future.

The report, which also surveyed insurance asset managers and family offices, noted that 81% of pension funds plan to increase their hedge fund allocations by at least 10% or more. This is higher than the 54% of sovereign wealth funds and 49% of wealth managers or retail investors planning similar moves.

Beacon’s research findings come as total assets under management (AUM) for hedge funds hit a record $4.6tn at the end of the first quarter of 2024, according to data from Hedge Fund Research.