Finland’s Valtion Eläkerahasto (VER) is to place greater emphasis on alternatives despite “exceptionally vibrant” stock market growth helping it return 5.5% so far this year.

The €18.3bn fund used to pre-finance the Finnish state pension said its equity holdings returned 13.3% over the first six months of the year, ahead of returns from alternatives or fixed income.

Managing director Timo Viherkenttä, who was announced as successor to Timo Löyttyniemi in April, warned the “exceptionally vibrant” equity market is losing steam, but holdings in Europe and Japan had continued to perform.

“It is advisable to prepare for continued fluctuations in the investment markets in the latter half of the year as well,” he said, citing uncertainty surrounding Chinese economic growth and a rate increase by the US Federal Reserve, expected later this year.

Talking to IPE in the wake of Chinese market volatility that saw the Shanghai Composite Index lose a quarter of its value and led to losses across global markets, Viherkenttä admitted that China was now the number one issue, supplanting a rate hike by the Fed.

“It seems that the Fed [rate] increase was a bigger topic a some time ago, but now things are getting pretty nasty in China and in emerging markets, the potential US rate hikes starts to look like, maybe not a marginal matter, but still something of less relevance.”

He also said that VER had sold its holdings in Chinese A shares before he took over as managing director as there were “symptoms of overheating”, but still retained exposure to H shares traded in Hong Kong.

Asked where the fund would seek to grow exposure, Viherkenttä pointed towards alternatives, which currently account for 10.6% of its portfolio, a 2 percentage point increase over June 2014.

“What we are doing all the time is taking an even closer look at alternatives,” he said. “But of course almost everyone is doing it these days, because both the stock market and the bond market are in such a difficult situation.

“It’s not a free lunch just to go out there are reap high returns.”

VER’s alternatives portfolio currently consists of indirect and direct private equity holdings , indirect real estate, and hedge finds.

Its unlisted holdings performed the best in the first half of the year, returning 6.1%, followed by a 3.6% return from hedge funds.

The fund’s fixed income holdings, which account for 49.5% of assets, returned 0.5% over the first six months of the year, down compared to both full-year results and the first six months of 2014.