The very mention of the word "alternative" tends to make some pension fund trustees break out in a cold sweat as they equate it with risk.

But as this is the time of year when fund trustees take some time out to make plans for the year ahead, review the previous year and make resolutions that they might do better in the coming year, it should also be the time that they look at investment strategies and opportunities offered by alternatives.

Alternative does not equal risk, in fact this is very far from the reality.

Alternative investments can cover a huge spectrum of strategies and instruments, from aggressive hedge funds to private equity funds, and can extend to encompass emerging sectors or themes which can be accessed through companies quoted on regular stock exchanges.

They can be viewed as "alternative" because they will respond to market conditions in a different way to more traditional equity strategies.

When combined with more mainstream equity investments within a portfolio they can have the effect of reducing rather than increasing overall portfolio risk. This may appear counter-intuitive but there's logic behind it.

Take energy for example. A normal pension fund with a standard equity investment strategy will find that oil price rises have a negative impact on its value. Increased energy costs hit the profits of most industry sectors, placing a downward pressure on stock prices.

However, alternative energy stocks in areas such as wind, solar or biofuels respond positively to oil price rises and will bring some protection to a portfolio as well as giving exposure to a really exciting investment theme.

And the performance of the alternative energy sector is not necessarily dependent on high oil prices continuing.

Worldwide energy policy is also driving growth in the sector. The EU has set a target of increasing the share of renewable energy in primary energy from 6 per cent to 12 per cent by 2010. And the share of electricity from renewable sources is targeted to rise to a 21 per cent share of the market by 2012

In the transport fuels area, the EU has set a goal of biofuels achieving a market share of 5.75 per cent by 2010. This will require compound annual growth in the sector of more than 35 per cent in the coming years.

In the US, a range of tax credits to incentivise biofuels producers are already in force, while the latest Energy Bill has targeted a near doubling of biofuels production to 7.5 billion gallons by 2012.

And biofuels are already big business in the US where ethanol is the primary biofuel making up about 3 per cent of the US annual gasoline usage

Government concerns in relation to security of supply as well as exposure to price spikes means that the alternative energy sector should continue to offer strong growth prospects for the foreseeable future.

And what makes it particularly attractive from the point of view of a pension fund is that it is relatively uncorrelated to the performance of its other assets. Global energy demand continues to grow and this will drive the alternative energy sector.

Another relatively uncorrelated alternative investment is water. Indeed, it is known as "blue gold" among many investors.

Finite supplies of fresh water mean that major investment is required in both delivery and distribution systems, as well as in recycling facilities and the development of new supply sources.

It is currently estimated that the US requires investment of $150 billion in its water infrastructure by 2016, while China's government plans to spend $125 billion by 2010 to build waste-water treatment plants and upgrade water distribution infrastructure.

Furthermore, it is forecast that desalination facilities will account for 6 per cent of the world's fresh water supply by 2015, up from 3 per cent today.

Among the more interesting facets of this sector is the fact that many of the companies operating within it are large blue-chip European and US concerns with strong track records behind them. This further reduces the risk for investors.

A number of funds concentrating on assets in these sectors are coming to the market at the moment and should be high on the list for discussion by all pension fund trustees.

The argument is not that funds should invest massively in these areas but that they should consider taking strategic positions within them. This will reduce overall risk and deliver the potential for higher returns overall.

Our own alternative energy fund has shown growth of 13.4 per cent in the period from January 1st to end December, 2006. This compared very favourably with the MCSI growth of 5.3 per cent during the same period.

Water is already showing strong growth, with the KBCAM Eco Water Fund delivering 14.8 per cent growth between January 1st and end December 2006.

• Seán Hawkshaw is chief executive of KBC Asset Management. The views expressed in this article are the opinion of KBC Asset Management Ltd and should not be construed as investment advice