Under-funding, lack of transparency and high fees are restricting pension funds' cash allocations to alternative investments, according to the white paper published by Northern Trust, entitled Why Diversification is Such a Hard Thing to Do. It shows that although the under-funded status of pension funds was cited by over 80 percent of respondents as a factor driving their investment goals, pension funds remain cautious about alternative asset classes. They feel that they can achieve the returns they need to meet future liabilities most cost effectively by investing in the long-only mainstream asset classes.

When asked specifically about their attitude to hedge funds - which is the biggest component of the alternative asset classes - one in two pension funds said they were not in hedge funds, and over a third intend to stay out.

The white paper also highlights regional variations in attitudes to alternatives. US investors perceive alternatives as established asset classes that are effective in bridging the funding gaps and retaining talent whereas, in contrast, in Europe and Asia-Pacific, investors are far less inclined to view alternatives favourably.

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