Switzerland: Alternative route to diversification

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Are Swiss pension funds overcoming their traditional aversion to hedge funds and alternatives? Nina Röhrbein reports

"Most Swiss pension funds to date have added alternatives in the pursuit of additional diversification of assets and managers," says Christoph Ryter, president of the Swiss Pension Fund Association (ASIP) and CEO of Migros-Pensionskasse. "Their exposure remains in the single digits."

According to Complementa Investment Controlling's Risiko Check-Up survey, Swiss pension funds were on average - non capital-market weighed - invested in private equity with 1%, in hedge funds with 3%, in commodities with 1.5% and in others - mainly balanced funds - with 1% at the end of December 2009. Private equity and hedge fund allocations were lower than in previous years, while exposure to commodities increased from 0.9% at the end of 2008 to 1.5%.

The study also showed that 67.5% of survey participants were invested in alternatives.
Commodities became popular slightly later than private equity and hedge funds but 42.3% of survey participants are invested in them, compared to 31.1% for private equity and 53.6% for hedge funds.

Hedge funds were welcomed with a lot of euphoria into the Swiss market, but this was followed by great disappointment in 2008.

"Investors have asked questions about hedge funds and positioned themselves differently since the financial crisis or have even retracted from the asset class," explains Christoph Oeschger, CEO of several pension funds, president of the Avadis real estate comittee and member of its private equity committee.

Hedge funds and other more complex alternative investment strategies have long enjoyed a bad image, meaning that many Swiss pension funds - concerned about their reputation and negative headline risk - stay clear of them, according to Felix Kottmann, CEO of Kottmann Advisory. "Other major reasons for the reluctance towards hedge funds may be the existing lack of knowledge of them among investors as well as consultants, and a general unwillingness to spend sufficient time and energy to dig deeper into these investment strategies," he says. However, Kottmann points out that for a small group of pension funds, which started to analyse alternative asset classes many years ago, hedge funds and commodities now make up a large part of their asset allocation.

In 2006 and 2007 Swiss pension funds started to look at infrastructure following recommendations from consultants and banks following investments in private equity and hedge funds, according to Oeschger. However, while some pension funds followed through with investments in this highly illiquid asset class, many stopped that process completely in 2008, making infrastructure relatively uncommon in Switzerland.

Oeschger says there is an ambivalent attitude towards commodities. "Some pension funds swear on them and their advantages such as inflation hedging and low correlation with other asset classes and are invested with 2-4% of their total portfolio, while others believe they bring a lot of risk but no extra yield."

Other alternatives such as cleantech have yet to reach the radar of Swiss investors.
"The main concern for Swiss pension funds today is the low interest rate environment," says Oeschger. "Against this background absolute returns products have been developed and are gaining in importance."

"At present absolute return orientated products or alternatives with an absolute return component are being favoured," agrees Derick Bader, head of marketing and reporting and in charge of a team of alternative product specialists at Pictet. "Commodities may bring a lot of diversification but are a very directional asset class. A combination of different types of market exposures, which provide absolute returns but with good liquidity and little counterparty risk, are currently popular with Swiss investors, who have grown tired of the market volatility. In order to achieve a minimum interest rate of 2.5% each year in this low-interest rate environment, Swiss institutions have started to favour absolute return strategies, such as market neutral type strategies or equity long-short strategies with good capital protection at the expense of more volatile asset classes such as equities."

Whether alternatives will become more important to Swiss pension funds in the future remains to be seen.

But Bader says: "On the alternatives side the worst is over and investors will probably show much more faith in these type of products in the future."

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