As it turns out, the hedge fund sector - - where much of the U.S.'s financial brainpower was deployed this decade - - was not immune to the financial turmoil that rocked markets world-wide in 2008.

The hedge fund sector lost $350 billion, or about 12% globally in 2008, according to data compiled by Eurekahedge.com(subscription required.) Further, funds that invested in North America lost the most, registering a $183 billion loss for the year.

Also, concerning strategies as 2009 begins, Eurekahedge concluded that most hedge fund managers are currently positioned for an environment of heightened risk aversion and volatility, with lower leverage levels, and high cash positions, throughout the sector.

In addition, Eurekahedge sees trend-based and arbitrage strategies in the commodities and currency markets as the likely best hedge fund performers short-term, with opportunistic / value plays in the credit markets, and to a lesser degree, in the stock markets, performing better longer-term.

Start with a few speculative stocks. Add a distressed-debt corporate bond portfolio, and two quantitative-based hedge funds, and a momentum-based hedge fund for the British pound/Japanese yen currency pairing.

Sounds like a typical, assertive portfolio for a wealth management group or, perhaps, for an accredited investor.

But a public pension fund?

Public pension funds in the United States are increasing bets on high-risk hedge funds and real estate in an attempt to fill deficits in retirement plans and recover ground, due to the worst performance by pension funds in six years, Bloomberg News reported Thursday.

Public funds, which manage more than $2.45 trillion in assets, are trying to reverse losses averaging 5.5% for the year ended June 30, according to Merrill Lynch data, and stem the tide of deficits, Bloomberg News reported. The State of New York's comptroller is asking its Legislature to increase its alternative investment spending cap; in February, the State of South Carolina upped its alternate investment / private equity / real estate cap to 45% from 0%.

'Investment distortions of the very worst sort'

Economist Glen Langan told BloggingStocks Thursday he doesn't like the sound of the new stance by state / local governments, if the aforementioned represents a trend.

"I view it as another manifestation of the U.S. stock market slump," Langan said. "The underperformance of stocks and the drive for outsized return on equity is leading to investment distortions of the very worst sort. We saw this in the mortgage market with their securities. It got to a point that if the interest rate was high enough, banks made the loan. We've seen it in oil, where the unattractiveness of stocks led institutions to dive into oil futures, driving up prices well above historic gains. And now it looks like public pension funds are catching the bug or flu."