(April 15, 2010) — Institutional investors in Europe, including pension funds, are returning to hedge funds after turning their backs on them during the financial crisis, a new survey by Mercer shows.

According to Mercer’s 2010 European Asset Allocation Survey, 3.8% of UK pension funds are planning to increase their allocations to hedge funds this year, though 6% expressed plans to do so in last year’s survey. The return to hedge funds follows a string of reforms to increase hedge fund transparency and bolster oversight. For example, the Securities and Exchange Commission (SEC) has proposed providing regulators with access to information from hedge funds and other traders in order to investigate potentially illegal trading activity. Former Federal Reserve Chairman Paul Volcker has also urged for banking regulations, pushing for the passage of President Obama’s financial regulatory overhaul bill that would create an independent financial consumer protection agency to increase hedge fund oversight.

The Mercer survey also shows pension funds continue to move away from equities despite market recovery with funds becoming more proactive in seeking new investment opportunities. Additionally, at least 16% of schemes are seeking growth in emerging market economies. Meanwhile, fee structure that rewards general market rises as opposed to real added value remains a possible barrier to further investment, HFMWeek reported.

The survey, which was conducted with over 1,000 European pension funds with assets of more than $678 billion, found that 32% of schemes have considered the potential impact of current fiscal stimuli packages on their strategy and are mostly concerned about the effect an increase in inflation would have on their assets and liabilities.

“With interest rates likely to remain low and national debt burdens increasing across European countries there is the potential for upward inflation shocks. An increase in inflation can lead to increased pension fund liabilities through higher salaries and increases to existing pensions,” said Tom Geraghty, Mercer’s head of investment consulting for Europe, Middle East and Africa. “Schemes would traditionally protect themselves against inflation by purchasing inflation-linked gilts, which are currently quite expensive. But interestingly, many schemes are now taking action through the more creative route of increasing exposure to inflation-sensitive assets.”

In recent news, a Credit Suisse Group AG survey of roughly 600 institutional investors with a combined $1 trillion in assets under management revealed that global hedge fund assets will hit its pre-financial crisis peak of nearly $2 trillion by the end of 2010.