The Rail Pension Fund is set to become the UK's biggest single investor in hedge funds.
Pension funds are looking for new strategies to boost returns
The pension fund will invest about £600m, or 5% of the total fund, in hedge funds, which are often regarded as a risky form of investment.
Pension managers are hoping the use of hedge funds will boost returns.
Hedge funds are sophisticated financial instruments usually used to bet or "hedge" against falls and rises in share markets and currencies.
George Soros famously made billions from the hedge fund he was running when the pound was forced out of the Exchange Rate Mechanism in 1992.
The chief investment officer at the Rail Pension Fund (Railpen), Chris Hitchin, said he believed the risk of investing in hedge funds was quite low.
"There are about 6,000 hedge funds and many won't make any money at all", he said, but added he was confident that the fund could achieve returns of about 7% a year.
"As institutional investors we have to use every tool in the box," he said.
But the RMT rail workers' union has reacted with alarm.
The union is worried at what it sees as a shift in policy by Railpen - historically a risk-averse fund - and is concerned about pension money being put into what many see as a volatile investment instrument.
Heavy damage to the image of the industry came in September 1998 when Long-Term Capital Management collapsed in the US.
Some hedge funds use financial tools such as derivatives, which US investment guru Warren Buffett has described as "financial weapons of mass destruction".
Hedge fund managers can also use techniques such as going long or short - buying and selling currencies and stocks that they do not actually own - to take advantage of short term market movements.