Hedge funds, and particularly funds of hedge funds, have been getting a bad rap of late, but consulting firm Mercer is standing by these investment strategies – at least in theory.

Writing on the Mercer Linkedin Group dialogue recently, Nick White, Mercer director of consulting, says that when used properly in the context of the whole portfolio hedge funds should deliver uncorrelated returns and be used as a useful diversification mechanism. They are not necessarily an equity replacement strategy.

“We do recognise that the average hedge fund experience has fallen short of the ambition of “equity-like returns with bond-like volatility” but our live investment experience gives us confidence in their attainability. The dispersion of returns from hedge funds is all the more reason to undertake rigorous due diligence in order to select “best of breed” managers to invest with.”

White had posed the question on the Mercer blog: “Can your hedge fund deliver equity-like returns with bond-like volatility?” He added: “The reward for investing in hedge funds should be meaningful given all the baggage that they carry.”

Mercer defines hedge funds as a “collection of heterogeneous investment strategies that tend to have disparate risk/return profiles”.

White says individual hedge fund managers implementing the same investment strategy will often target and generate contrasting risk profiles.

Fees, which are often criticized for being too high, are a separate issue. In a paper on the subject last year, Mercer pointed out that there is more to fees than price. It basically comes down to whether they represent value.

While most surveys of institutional investor intentions published in the past year or so predict an increasing allocation to hedge funds, along with other alternatives, there is little evidence of this among pension funds in the Asia Pacific region. The big sovereign wealth funds and some well-funded defined benefit funds have shown interest but few defined contribution schemes.