SWEDEN - AP7, one of the default funds in the Swedish Premium Pension Authority (PPM), has confirmed it is switching from fund of hedge funds to hedge fund replication strategies in the next quarter.
Richard Grottheim, executive vice president of AP7, told delegates at the Pension Fund Investment World Nordic 2008 conference in Stockholm today the SEK 80bn (EUR8.6bn) fund had already reduced its allocation to hedge funds from 4% to 2% in 2007 because of "disappointing returns" in the market.
In addition, he pointed out the fund's decision to introduce an alpha-beta separation strategy three years ago meant it would become more of an alpha source for the fund than hedge funds, as it tends to focus on long-only managers.
Although Grottheim pointed out AP7 reviews its asset allocation every three years, the last of which was conducted in 2007, he admitted the fund would be "finishing in hedge fund of funds in the summer" and would be moving into hedge fund replication strategies "in the quarter ahead".
He said there were two reasons for the change into replication strategies - which aim to provide hedge fund returns without the fees by using 'alternative beta' such as credit and volatility risk - including the difference in costs.
Grottheim said: "We've decided to move from fund of hedge funds to replication strategies. It's more of a beta approach and more cost efficient but achieves the same returns."
However, he pointed out the "most important reason" was the "media risk" associated with being a public investment entity with a high level of transparency, as the fund had previously invested in the hedge fund Amaranth - which collapsed in 2006.
He said although AP7 can try to explain to the media why these are diversifying investments "it takes too much resources and energy", while replication strategies have the added benefit of lower fees.
In addition, Grottheim revealed AP7 will also be increasing its allocation to private equity from the current level of 8% to 10% next year, and said it is likely to increase the number of "alpha centres" in its portfolio which are part of its alpha-beta separation strategy.
AP7 has six alpha centres at present, which generate "pure alpha" - where outperformance is measured as positive returns above a zero line and where beta is as close to zero as possible.
These "alpha centres" are currently made up of three Swedish equities, two currency, and one European strategy, though it hopes to add another European centre "after the summer".
Grottheim admitted the fund will also be reviewing the progress of the alpha centres strategy "after the summer" and, expects to add further asset classes if proven to be successful, with the main possibilities for inclusion being Japan, Asia and emerging markets.
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