Public pension funds in the U.S. are increasing their investments in hedge funds and real estate in an attempt to fill deficits in retirement plans and make up for their worst performance in six years.

New York Comptroller Thomas DiNapoli is asking lawmakers to increase a cap limiting the amount of alternative investments in the state's Common Retirement Fund. Currently the fund is authorized to invest as much as a quarter of its assets in alternative investments.

South Carolina's retirement system adopted a plan in February to invest as much as 45 percent of its $29 billion in hedge funds, private equity, real estate and other alternative investments. 18 months ago the share of alternatives was zero. According to Merrill Lynch the losses for public funds in the year ended June 30 averaged 5.1 percent.

Critics point out that higher potential returns also involve higher risks. The possible result could be even higher deficits in the future. Massachusetts Pension Reserves Investment Trust lost $80 million in the last two years on investments in Amaranth Advisors LLC and Sowood Capital Management LP, two collapsed hedge funds.