FINLAND - Including hedge funds in investment portfolios can improve risk/return ratio at work pension insurance firms, a new research by University of Oulu has found.
Professor Hannu Kahra, who researched the role of hedge funds in portfolios of earnings-related pension investors in Finland, found that by combining hedge funds with a regular investment portfolio, the risk/return ratio of the optimal CVaR-efficient portfolio is usually better than that of a portfolio containing no hedge funds.
In addition, all risk figures of the optimal portfolio, especially key figures describing downturn risks, are smaller than in the comparison portfolio.
The research was completed in cooperation with research doctor Juha Joenväärä and PhD candidate Pekka Tolonen for the Finnish Centre for Pensions (ETK).
It was made by comparing the performance of the average investment portfolio - between 1999 and 2010 - of Finnish work pension companies and an imaginary portfolio including also hedge funds.
At present, an average investment portfolio of a Finnish work pension insurer has 6% exposure to hedge funds, which returned 1.9% over the first quarter of 2011.
Kahra wrote: "Hedge funds as an investment target have attracted a lot of suspicion and uncertainty. Institutional investors, however, are increasingly interested in them. Regulators, too, need [further] information on alternative investments."
The study noted a successful choice of a hedge fund requires notable expertise from a pensions company, the use of consultants and possibly also investing in databases and programmes that help to analyse the data.
"Large investors with sufficient resources have the opportunity to benefit from scaling benefits in selecting hedge funds," Kahra wrote. "Smaller pension investors, on the other hand, may outsource their choice of hedge fund to a fund that is specialised in investing on behalf of other funds."
Staffan Sevon - chief investment officer at the €2.1bn Veritas Mutual Pension, which is increasing its allocation to hedge funds from 2.7% to 5% over the coming year - agreed.
"We currently have only one person focusing on fund selection," he told IPE. "This means we will need external support in identifying new potential targets. Our exposure to hedge funds at the end of this year will depend on what kind of strategies we will find."
A gradual return to hedge funds is on the cards also at the €13.9bn State Pension Fund (VER).
VER's hedge fund exposure fell from 2% to 1% over 2009.
Timo Löyttyniemi, managing director at the fund, said: "In mid-2010, we made four new investments in the asset class. There will be no radical change in our alternatives portfolio as such, but a gradual comeback of hedge funds."