NETHERLANDS - PGGM, the €77bn Dutch health care pension fund, has confronted the hedge fund "dilemma" head on in its latest quarterly report.

It asks the rhetorical question: ""Have pension funds lost their moral compass by investing in hedge funds?"

Announcing a third-quarter return on investments of 3.1%, the Zeist-based scheme sought to explain its position on hedge funds.

"Hedge funds have attracted negative publicity in recent months, brought on by those hedge funds which actively seek out what they consider to be undervalued companies and challenging the management," it said.

"We feel that this adverse publicity is exaggerated. There are good hedge funds and bad hedge funds, and some are more aggressive than others.

"The publicity has, however, served to highlight the dilemmas raised by pension funds investing in hedge funds, PGGM has a reputation to uphold as a responsible investor. Are hedge funds compatible with that role? We take the view that they are.

"The principles we apply as a reasonable investor also apply, of course, to our hedge fund investments.

"Those investments therefore are also judged against our criteria. This is not an easy task and we cannot guarantee that PGGM will never invest in hedge funds (or other asset classes) whose activities may at times conflict with those principles. In this case, too, there is no such thing as a risk-free return."

The fund invests €836m in hedge funds or just over 1% of its invested capital. It's made an average annual return on the asset class of 8.7% since 2003. It invests via fund of hedge funds, giving it exposure to more than 100 hedge funds.

The third-quarter return of 3.1% was driven by an 8.8% return on real estate and 4.8% on equities. Commodities had a negative return of 18.1%.