Hewitt Associates has said that hedge funds should no longer be seen as just an alternative asset class and urges pension funds to consider long/short equity managers as part of their overall equity allocation.

Guy Saintfiet, senior hedge fund researcher at Hewitt Associates said: “We have been a strong advocate of the use of hedge funds in pension fund portfolios for a number of years and have recently seen increased demand for hedge funds from our clients. We believe that the step to include long/short equity is a natural progression from, and complement to, unconstrained active equity management. Hedge funds have an extra degree of freedom to use shorts which can add tremendous value, especially in volatile and bear markets.”

Hewitt’s opinion is underpinned by the performances of both its global unconstrained equity recommended list (which has outperformed the MSCI world index by around 3% per year since 2002) and its recommended list of long/short equity managers which, over the last three years, outperformed the MSCI by 11% per annum. Earlier this year, Hewitt announced it had performed more than twice the number of hedge fund manager searches during 2009 in comparison with 2008.

Guy Saintfiet continued: “Our recommended list performance shows that hedge funds can generate very attractive risk- adjusted returns. However, the hedge fund universe is vast and managers need to be selected carefully to ensure they are able to add value from stock selection and asset allocation as well as managing net and gross exposure levels.

“As with all other funds we recommend to our clients, we require hedge fund managers to adhere to what we believe is best practice. For instance, we expect them to be registered with the local regulator (FSA or SEC), have an independent administrator, a strong culture of risk management and a willingness to provide us with full transparency of the positions they are taking.”

John Belgrove, principal consultant in the UK Investment team at Hewitt, said: “During the credit crisis, the hedge fund industry was hit by significant redemptions from many private investors. This experience underscored the importance of having a professional client base such as pension funds. They, in turn, are increasingly aware of the value hedge funds can add to their portfolios.

“This is especially true in the light of recent market events which have brought home the need for a more diversified approach to portfolio construction. Hedge funds, in our opinion, are part of this solution and trustee education has already resulted in a better understanding. Our clients have become more comfortable with the long/short equity strategy and we only expect this trend to continue.”