Nordic investors, including PKA, Ilmarinen and ATP, have praised the cost benefits and additional control over investment risk gained by shunning hedge funds in favour of strategies that emulate the asset class.

Staffan Sevón of the €34bn Ilmarinen said that while the pensions mutual did have some exposure, it preferred to allocate to an absolute return portfolio viewed as an “internal” hedge fund. 

The mutual’s head of tactical asset allocation told the November issue of IPE there were significant benefits in managing the exposure in-house.

“As well as the cost benefits, we can be more dynamic, and there are no gating problems,” he added.

“Also, we know all exposures in real time, which means we can co-ordinate our internal hedge fund-type investments with the overall portfolio, avoiding duplication or counter-transactions.”

Søren Grooss, portfolio manager at Denmark’s PKA, said the fund bypassed hedge funds, instead pursuing strategies that employ similar instruments such as leverage and derivatives.

“This choice is partly to do with cost-efficiencies, but, the fact is, we believe we can do the things hedge funds are doing,” he said.

“We are comfortable with those strategies, so there is no reason to pay a firm to package them.”

ATP’s CIO Henrik Gade Jepsen echoed the concern over hedge fund costs, noting many had strategies in place that were essentially risk-factor investments that could be run more cost-efficiently in a different structure.

He also cited the importance of keeping risk-factor investing in-house.

“I would never embark on this strategy by outsourcing everything because you would be outsourcing a big chunk of your total risk,” he said.

“And there are so many issues you need to make sure you understand.”

Christer Franzén, CIO at the SEK18bn (€2bn) Ericsson pension fund, also warned fellow pension investors of the downside of investing in hedge funds.

“I do not believe we should all expect to get positive alpha returns if we all invest in hedge funds,” he said.

“By definition, there will be winners and losers, and there is a chance the size and knowledge of the investor may play a role in that.”

For more on hedge funds and alternative strategies, see On The Record in the current IPE