The Local Government Superannuation Scheme (LGSS) is undertaking an asset allocation review to restore member confidence in the fund after it posted falls in returns.

"We are thinking about our current investment objectives and considering our risk constraints," LGSS chief investment officer Craig Turnbull said.

"Members have been disappointed by the extent of the fall in their returns and the purpose of the review is to protect them from such circumstances in the future."

The review is being conducted with LGSS's asset consultant Intech and will focus on asset allocation ranges.

Turnbull said he expected the fund would introduce new investment strategy options as a result of the review.

The fund would also consider the structure of its diversification strategies, he said.

"We are looking at reducing our risk by investing in sectors that have low correlation with other markets. We have found that diversification does not always reduce risk," he said.

The review will also focus on liquidity risks from investments in alternative or illiquid assets.

"The fall in the equity markets has shown how allocation to that sector can rise," Turnbull said.

"There is the awful feeling that if there were mass member exits or switches to cash, what sort of liquidity pressures would that put you under?"

As a result of this, LGSS has plans to introduce a liquidity policy that will monitor exposure to illiquid assets and provide risk analysis.