Hedge funds now represent a small but significant part of the portfolios of some of Sweden’s foundations.
The Swedish Foundation for Strategic Reseach (SSF) took its first tentative steps into hedge funds last year. Bjorn Brandt, director of administration at SSF says: “To diversify foundation assets and obtain a performance that is positive even under bear market conditions, the foundation decided to set aside a small fraction of its total capital – up to 5% – for special investments. During 2001 we started to invest in a low-scale, step-wise process in three hedge funds.”
SSF made an initial investment of Skr150m in Nektar, a hedge fund managed by Brummer and Partners, a specialist Swedish manager. Nektar is a market-neutral fund that aims to achieve a sustained risk-adjusted return and low systematic correlation with stock and bond markets. Investment is based on fixed income securities, although it can invest in equity and foreign exchange trades. Management is mostly quantitative,
SSF followed this with an investment of SKr150m investment in the Eikos hedge fund, managed by another Swedish specialist manager, Harald Lundén, and Skr75m in the Tanglin fund, a hedge fund invested in bonds, shares and the money market and managed by Stockholm-based Tanglin Investment Management.
“These investments are made in Swedish-based relatively low risk funds where the track record and managers of the funds are well known to the foundation,” says Brandt. “They give the foundation access to a few market-neutral investments which means that the probability of a good performance of the investment is just as high when the market goes up as when it goes down.
“It was very important for the foundation that we made the investment in managers we knew well and relied on. That’s why we avoided choosing the large Swedish banks as hedge fund managers. We were really looking for small, qualified, competent Swedish firms where we knew the managers and we knew that they had their own private capital invested in their funds,” he says.
Investment in hedge funds is likely to remain modest, he adds. “Hedge fund is still a limited fraction of our investment. We are of course not prepared to take the risk involved. So there is a limit of 5% on hedge fund investment.”
The Jubilee Fund has also added hedge funds to its portfolio. Besides Nektar and Eikos, it also invests in Zenit, Brummer’s largest hedge fund. Zenit has a long/short global equity strategy, using futures and short-sell strategies to increase risk control and capitalise on expected price movements. Investment is concentrated on shares and share-related instruments.
The fund’s finance dorector, Torgny Prior, says the foundation will invest only in hedge funds whose managers are known to them and who have a track record. “Brummer have been doing this since 1996 and we know their people well.”
The fund classes hedge funds as traditional assets rather than special funds. “We consider two of them are part of the equity portfolio and the other one as part of the bond portfolio, but maybe it should be an asset class of its own.
“We probably should increase our exposure a little, but we can’t be too opportunistic,” he says. “Most of the managers are now doing the same thing. Everyone has gone short in telecoms so if we keep increasing it at the same time as the market we could lose money.”