"The fact that people are unrealistic is actually creating risky behaviour in the way that they are putting money to work," said Hunt  Seeking such a yield "is wishing for a world that we don't see enough evidence out there to bet on yet. We do think that's what's driving some of these risky allocations and the big shift into alternatives, which we also are worried are not going to ultimately end up generating the returns that they promised."

Hedge funds are facing fresh scrutiny after US billionaire investor Warren Buffett said at his annual meeting Saturday that investors can often do better by avoiding the fees and sticking with bets that track the S&P 500 index. Hunt said in the interview that stocks have become less attractive after so many fixed-income investors switched to equities because they were frustrated with low yields on the safest bonds.

Investors would be smarter to target returns of 6 per cent to 7 per cent, considering the state of the economy and central bank policies to keep interest rates low to stimulate growth, Hunt said. He recommends real estate investing and said he bet on high-yield debt earlier this year in a period of market volatility.

Managing expectations

His business, PGIM, oversees money for clients including 136 of the top 300 global pension funds, according to its website.

"We spend a lot of time with our clients actually trying to get them to take the bold step of bringing some of their expectations down," Hunt said, noting that his approach works in some instances, but not always. "It's very appealing to have other kinds of investors come in, and say 'Oh, we can. We can just add leverage, we can find ways to get you 10, 12, 14 per cent on it.' We don't see that many asset classes out there that are going to do that right now."

Bloomberg