EUROPE – Corporate pension funds are changing their thinking about hedge funds, prompted by pension obligations being treated as debt, according to a new report by Morgan Stanley.

“Our interviews …suggest the thinking of corporate pension funds is changing and we believe the tipping point could be brought about by the fact that the rating agencies are now treating pension fund obligations as debt,” said Morgan Stanley analysts Huw van Steenis and Bruce Hamilton.

“Many corporates, we believe, think that their strategic investments are or may be constrained by the volatility of the pension fund obligations and thus wish to lower this volatility.”

“Consultants, risk aversion and fees have to date been a drag anchor on the adoption of hedge funds by pension funds and insurance companies, but sentiment is changing,” they add.

But there were several factors which could hinder the speedy take-up. “Our research suggests volatility of outcome, fiduciary responsibility of trustees, lack of transparency, governance issues and lack of long track records will continue to make consultants reluctant to advise funds to increase their allocation to hedge funds too quickly.”

They said European institutions had around a two percent exposure to alternatives, excluding property, at the end of the first quarter of 2003, with most of that being allocated to private equity.

They saw a greater proportion of inflows into hedge funds coming via fund of funds.

The analysts made the comments in a report on Man Group, saying the alternative investment specialist could be well placed to benefit from the situation. They added that a well-structured fund of funds or manager of managers