EUROPE – European pension funds have not followed through on expectations that they would increase their use of hedge funds and private equity, according to new research from Greenwich Associates.

“Many institutions have been talking quite forcefully about venturing further into these asset classes, but in practice most have continued to dabble,” the firm said.

It said allocations to hedge funds and private equity have remained flat at about 1% of assets for each of the past three years.

“And now that hedge fund returns have fallen off, the proportion of European institutions planning to start using hedge funds has dropped from 19% in 2004 to 8% in 2005, and the proportion expecting to hire a hedge fund manager has fallen from 23% to 8%,” the Connecticut-based consulting firm added.

Analyst Berndt Perl said: “There are a huge number of hedge fund conferences planned all over Europe for the next year, but who knows who is going to attend them?”

Greenwich noted the dilemma that Continental European funds are in, namely how to improve returns in an environment that encourages them to adopt a conservative investment stance.

It said they are caught between the need to generate additional returns and new accounting rules that seem to penalize risk-taking.

The comments come in Greenwich’s 2005 report on the European investment management industry. It found that solvency ratios at Continental pension funds continued to deteriorate in 2005. This exacerbated the need for improved returns.

Greenwich said that the average European pension fund reported a solvency ratio of 95%, compared to 105% in 2003.

New mark-to-market accounting rules were prompting many European funds to “put on hold plans to shift their assets from government bonds to equities and other potentially higher-yielding investments”.

The firm said that Europe’s institutions have been telling it for three years that they plan to cut their bond holdings and shift to equities. “As a group, they have not followed through,” Greenwich said.

Government bond allocations were 29% at the end of 2004, from 27% two years earlier. Cash and equity allocations were flat.