GERMANY - The government plans to make it easier for German pension funds to invest in hedge funds in a bid to invigorate the nation's hedge fund industry, according to deputy finance minister Thomas Mirow.

"The investment rules must be amended so that German institutional investors can invest in alternative asset classes. This will enable them to realize higher returns like their foreign peers," Mirow told an audience of hedge fund managers in Berlin late Wednesday night.

Mirow said the easing of the investment restrictions would be part of an upcoming revision of Germany's investment law. He did not provide further detail and a spokeswoman for the finance ministry in Berlin was not immediately available.

Under the investment law, which took effect at the start of 2004, hedge funds were legalized in Germany. The finance ministry is expected to revise it in 2007.

But the law also stipulated that German pension funds and insurers could only invest 5% of their total holdings in hedge funds, whether single or fund-of-fund varieties.

Since the investment law took effect, 44 German hedge funds have sprung up. The funds have taken in around €2.5bn in assets from institutional and private investors - far below initial expectations.

Said Mirow: "The further development of Germany's hedge fund industry is crucial, even if Anglo-Saxon financial centers will continue to dominate this sector…Our efforts should be concentrated on getting a larger slice of the hedge fund pie."

Two of Germany's biggest pension funds - the €38bn Bayerische Versorgungskammer (BVK) and BVV, a €17.7bn scheme for Germany's financial sector - have invested in hedge funds.

By the end of 2006, the BVK, which serves professional trades in Bavaria, plans to raise its hedge fund allocation to €1bn. In the long-term, hedge funds could account for 5% of its assets. German consultant Alpha Portfolio Advisors is advising the scheme on its hedge fund strategy.

But while the BVK achieved a return of 7% on its hedge fund exposure last year, the BVV, which has 1% invested in the products, did not have the same performance.

In April, BVV chief executive Rainer Jakubowski told Germany's Börsen-Zeitung that the scheme's hedge funds had underperformed its bonds during 2005.

According to the newspaper, Jakubowski has given BVV's hedge fund managers until the end of 2006 to show "an above average return".