GERMANY - German institutional investors are still very reluctant to put money into hedge funds, despite the 2004 liberalisation of the market, says FERI Institutional Advisors.

"The interest is increasing," FERI managing partner Dirk Söhnholz told IPE. "Hedge funds are being talked about but it is a very long process for institutional investors to decide to invest and how to invest.

"Legal obstacles are hardly an issue any more. It is mainly distrust. Investors are sceptical about the segment. It is being questioned every time something negative on hedge funds is reported in the press or when hedge funds are losing money over two or three months."

A report released on suggests that the German hedge fund market will experience a boost over the next months, as the 2004 liberalisation of the market will finally take effect.

However, Jörg Sittman, general manager of Citigroup Investment Deutschland KAG, is convinced that it is only a matter of time before German institutions take the plunge, especially as equities are not performing as well at the moment.

"Last year there was a lot of noise surrounding hedge funds, but not a lot of action. One reason was that insurance companies needed time to build the risk control systems they must have in place under the regulations before they can invest in hedge funds.

"They also needed to gain an understanding of the different strategies. Now many are ready to make a move," Sittman said.

Should insurance companies and pension funds finally make more use of the new rules, a potential €60bn market would be created. Currently total assets in the German hedge fund sector amount to €2.3bn and customers are mostly high net-worth individuals.

For the majority of German pension funds their exposure rate to hedge funds is still around 0%, FERI's Söhnholz says.

Several things will have to happen to bring about a change in the institutional investors' attitude: "To put it simply, traditional asset classes will have to perform badly, hedge funds will have to perform relatively well, the press coverage must be good. Then an increase in investments can be expected.

"But such continuous periods have been relatively rare over the last few years." Furthermore, problems like bond-heavy portfolios which prove difficult in times of rising interest rates or too little equity allocation push new investments to the back of German pension funds' agendas, Söhnholz explains.