Amid the sound and fury in financial markets in 2008 and early 2009, one of the lesser told tales involved the relative resiliency of hedge funds.  Hedge funds were down by almost 20 percent last year, but the S&P 500 was down by almost double that amount.  Press reports emphasized that the hedge fund industry is likely to shrink “by half” in 2009 from its 2007 peak; but a new report from The Bank of New York Mellon Corporation and Casey, Quirk & Associates LLC found that the industry will almost double, in terms of assets under management, by 2013.  Moreover, the preponderance of the new assets invested in hedge funds is expected to come from pension funds, which remain interested in hedge funds for various reasons, including their uncorrelated returns, absolute return strategies and ability to manage risk in unique ways.  The continued and growing appetite among pension funds for hedge fund investments, combined with the laudable relative performance of hedge funds during the recent downturn, has created something of a conundrum for pension fund allocation guidelines.  Generally, those guidelines provide for the majority of funds to go into bonds (government and corporate) and equities, with a smaller percentage reserved for alternative assets generally or hedge funds specifically.  Oftentimes, those allocations are measured as of the date of investment, so subsequent events can results in actual allocations quite at odds with target allocations.  And that is just what has happened of late.  Hedge funds have declined, but other assets have declined more precipitously.  As a result, pension funds generally are “overweight” hedge funds and “underweight” certain worse-performing assets, such as equities.  The big question facing pension fund and hedge fund managers: will pension funds redeem from hedge funds to bring their actual allocations back into line with their target allocations?  Or will pension funds revise their target allocations to permit a greater proportion of their assets to be invested in hedge funds?  Research conducted by the Hedge Fund Law Report helps answer these important questions.