UK defined benefit (DB) pension schemes are continuing to increase their exposure to hedge funds as they seek liquid diversification, downside protection and greater flexibility around their endgame strategies, Aon has said.

The firm said improved scheme funding levels, shorter investment horizons and continued macroeconomic uncertainty were making illiquid asset classes less attractive to some trustees and sponsors.

Schemes considering insurance buyout or run-on increasingly wanted to preserve their stronger funding positions while retaining the ability to adjust their portfolios as their endgame plans developed, it noted.

Aon partner and head of EMEA fund management, Guy Saintfiet, observed that these changing requirements were supporting sustained demand for more liquid and agile hedge fund strategies.

“Against the backdrop of a changing economic and regulatory environment, UK pension schemes’ investment needs are evolving," he said.

“They want to keep their options open while also looking to preserve their strong funding positions.

“The improvements in pension schemes’ funding levels over the last couple of years and an increased focus on their endgame - including planning for a buyout or for running on - has prompted many schemes to look at shorter-term investment horizons.”

Saintfiet argued that this was reducing the appeal of some illiquid investments and contributing to continued interest in hedge funds.

Aon noted that increased market volatility, particularly since the beginning of 2026, had added to this momentum.

Institutional investors were seeking assets capable of delivering diversification from equity and credit markets, alongside steady absolute returns and sufficient liquidity to respond to changing conditions.

Saintfiet continued: “Pension schemes and other institutional investors are looking for liquid diversification and steady absolute returns as they navigate a macro-environment of heightened uncertainty and risk.”

Meanwhile, Aon stressed that hedge funds could also help institutional investors meet governance objectives, provided managers offered suitable liquidity, costs and environmental, social and governance integration alongside investment performance.

“Hedge fund solutions continue to address key needs of institutional allocators from both the perspectives of the returns they offer and governance,” Saintfiet said.

“The funds we have focused on combine strong investment results delivery with a focus on liquidity, cost and environmental, social and governance (ESG) integration.

“Funds that offer that combination continue to attract investment.”

Demand was not limited to DB schemes, according to Aon, with foundations and endowments also increasing their use of hedge funds.

While these investors typically had longer investment horizons than mature DB schemes, market volatility and delays in receiving distributions from private-market investments were encouraging them to use hedge funds tactically.

Aon UK investment practice partner, Tim Banks, argued that hedge funds could provide foundations and endowments with a larger liquidity reserve while they waited for capital to be returned from illiquid holdings.

“Hedge funds are clearly meeting the current objectives of DB schemes, but the asset class is also continuing to enjoy increased uptake from other investment clients such as endowments and foundations," he added.

“Unlike many DB schemes, they do have a longer investment horizon but, given the wider market volatility, they are choosing to use hedge funds in a tactical manner.

“This is providing them with a larger liquidity buffer while some illiquid investments are taking longer to return.”

---