EUROPE – European pension funds have been warned about a possible “herd mentality” developing in hedge funds.

“There appear to be a lot of pension funds in Europe going into hedge funds because everybody else is,” said Penny Green, chief executive of the Superannuation Arrangements of the University of London.

She told delegates at a conference organised by the Edhec business school that it seems schemes say to themselves “perhaps we ought to be investing”.

“People are rushing into it without thinking it through,” Green, who is also the president of the Pensions Management Institute, said.

The comments came as Edhec presented research showing that hedge funds are increasingly seen as mainstream not marginal by institutional investors. In the words of one delegate, even “the guys in plastic shoes” are getting interested.

Green also highlighted a number of issues with hedge funds, such as liquidity and transparency and the problem of how to identify managers with skill. Then there was the issue of the relatively young scheme’s status as a long-term investor.

In addition to this were “governance issues”. Green said: “If it all went wrong would you be liable as a trustee” when “hauled before the regulator”?

Günther Schiendl, head of investments at Austria’s APK, told the event that the fund had stopped looking at hedge funds as a separate asset class.

“We do not see hedge funds as a totally different asset class,” he said, adding they were more an “extension of existing asset classes”. Instead the fund refers to them by their strategy, which helps it to understand what they are trying to achieve.

He said: “I do not believe in all these managers going around saying they’re producing nothing but alpha. I very much doubt that pure alpha can be delivered in such high numbers.”

Richard Grottheim, chief executive of Sjunde AP-fonden or AP7, predicted that hedge funds could face competition from traditional long-only managers.

He noted that long-only managers could use their stock research to take on hedge funds, albeit at much cheaper fees.

The performance of AP7’s hedge fund portfolio has been “very much in line with what we expected”. It was “so far so good” although 2005 was a bad year.

He added that the search for beta was the “driving force” behind the fund’s move into the hedge fund space.

Edhec’s Mathieu Vaissié revealed that 60% of institutional investors in Europe consider themselves well informed of the nature of hedge fund risks. “Investing in hedge funds is not a fantasy any more,” he said. And some 7% of their assets were now in the area.

One thing to emerge from morning was how funds of hedge funds don’t necessarily deliver for investors. Both Schiendl and Green expressed reservations about them.

Edhec says that around three-quarters of institutions go for funds of hedge funds – the “standard solution”, although that figure should change dramatically in the next few years.