PensionReforms' summary and comments
The OECD took a look in 2007 at the amount of money that private pension schemes had invested in hedge funds.  So they asked regulators but they mostly didn't know.  That was before the global economic meltdown.  

First, an explanation of what the OECD was trying to quantify - what is a hedge fund?
"Generally these are pooled investment funds, structured as private partnerships which charge performance related fees.  They have a great deal of investment flexibility, often employing short-selling and leverage techniques and focusing on 'absolute returns' as opposed to beating a benchmark index.  Applying a more detailed description to hedge funds is difficult as they invest in a wide range of assets and apply a broad range of 'strategies'.'

Having asked the regulators, the OECD found limited hard data:
"This survey clearly highlights that pension fund regulators have limited information regarding how pension funds in their jurisdiction are investing in hedge funds.  However, some regulators have been able to gather such information from surveys (for example of the largest pension funds under their supervision), suggesting that other regulators could also gather such information, which would help the understanding of this trend on both a national and international level. '

If the trustees of pension schemes have discretion as to where their beneficiaries' assets were invested, it's at first a little difficult to understand why regulators might need to know how much was actually invested in hedge funds, despite the subsequent global falls in asset prices.  Here is an OECD look at what generally countries allow their pension schemes to invest in.  The rules are often very intricate and sometimes have specific restrictions on hedge fund investments (for example, Denmark - maximum 10%; Finland, Germany, Greece and Hungary- maximum 5%).  In some cases (such as Australia, Canada, the US), there were no restrictions but controls through compliance with fiduciary standards would be implicit in jurisdictions where the English-derived trust law prevailed.

The OECD concludes, in essence that more specific controls might be needed:
"[Hedge funds] can be particularly complex instruments for pension fund fiduciaries to understand, [so] regulatory authorities may wish to provide further guidance on how qualitative investment rules should be interpreted in relation to hedge fund investment."

PensionReforms is puzzled - if hedge funds are "particularly complex instruments for pension fund fiduciaries to understand", why might they even be contemplating buying them?  That seems to be the first question to address before wondering about hedge fund-specific regulation.

Apparently, regulators expressed concern in their responses:
"[R]egulators remained concerned that as pension funds exposure to hedge funds rises (as is expected) further policy responses will be required.  These are likely to focus mostly on transparency and risk management requirements.  Regulators may therefore wish to encourage greater transparency on the part of hedge funds themselves in order to help pension fund investors assess and manage risks appropriately.  Further work to improve risk management systems should also be encouraged."

Asking (or even requiring) hedge funds to be more transparent seems a forlorn task to PensionReforms.  A lack of transparency is their raison d'être.  That does, however, raise a more fundamental issue.  If trustees with a fiduciary obligation to their beneficiaries under trust law do not know what they are really buying when they invest in hedge funds, it seems unlikely they would be able to satisfy their duty of care to beneficiaries.  The fact that other pension schemes are also doing that would not seem to be a defence.  PensionReforms looks forward to the first case that tests this principle under trust law.

Having said that, PensionReforms thinks there isn't a strong case to specifically regulate whether trustees can buy hedge funds.  PensionReforms thinks that governments are probably best to say simply that the managers must act in the best interests of the savers (much as English-derived trust law requires) and then make the managers say on a regular basis what they are doing.  PensionReforms suggests this is more likely to produce the best outcomes for members (and the sponsors of Defined Benefit schemes that carry the investment risk).

In any event, as Defined Contribution schemes that give members investment choice become more common, it is difficult to see the potential role of more intricate rules or any justification for them, that effectively limit members' choices about where their money is invested.  Why should such members be prevented from investing all of their savings in hedge funds?  PensionReforms suggests that should be for members to decide. (File size 398 KB;  19 pp) 322