IPE asked three pension services - in Croatia, Sweden and the Netherlands - the same question: ‘What is your attitude to alternative investments?’

Here are their answers:

Dubravko Stimac, president of the management board at PBZ Croatia mandatory pension fund, which has AUM of HRK3.5bn (€477m)

We have to adhere to the investment limits prescribed by Croatian legislation and regulations, so our exposure to equities and government bonds is defined by law. Current legislation does not allow us to invest in alternatives other than investment in foreign exchange forwards in order to hedge the currency risk in our portfolio.

Our legislation is based on World Bank proposals, which in turn were based on the Chilean three pillar system and were already implemented in other emerging markets such as Bulgaria, Hungary and Poland.

It was introduced through the pension reform of 2001-02, and came with tight quantitative investment limits. However, after six years the Croatian pensions industry is no longer sure why such restrictions still exist. We think it is time to liberalise this system and move to the prudent man principle.

At the moment the regulator’s intentions are unclear but as an industry - with only four mandatory and seven or eight voluntary pension funds - we are pushing for a change in the system. We believe that pension funds should be able to invest in alternatives to curb the correlation between asset classes and limit the risks in our portfolio. We hope for a step-by-step liberalisation of the limits set by the regulator.

We are interested in all types of alternatives. For Croatian pension funds derivatives are considered the most important in that they can hedge the risks that arise from, for example, investment in domestic government bonds.

Real estate could also be very important to us - and we think that we are currently missing out on investments in real estate funds - followed by private equity and commodities.

When it comes to alternatives we are primarily thinking about risk diversification. But they can also deliver important returns, which we would view as additional elements for our portfolio.

Their volatility is less of a concern because we understand it and can calculate it according to some variations. As portfolio managers we would decide how much in alternatives would be included in our portfolio. It is a question of risk and if there is risk of inflation for example, we would include private equity or real estate in the portfolio.

Because we are still trying to push for a change in regulations we have not yet really thought about percentages; but we should have the possibility to hedge all the risk in our portfolio.

In terms of real estate, we would like to see an initial 5-10% allocation which we could gradually increase in line with a switch to the prudent man principle as the market in related instruments developed.

Peter Hansson, chief executive and CIO at SPK, the pension fund for Sweden’s savings bank employees, which has AUM of SEK15.6bn (€1.7bn)

In Sweden alternatives mean hedge funds, private equity and commodities. While some people suggest hedge funds are a separate asset class, when you try to allocate to them it quickly becomes clear they are just a different market rather than a different asset class.

We currently invest 70% in fixed income, 25% in equities and 5% in alternatives - purely hedge funds - for diversification reasons.

From a strategic point of view we have chosen
not to allocate to private equity because we do not want to be tied to the same manager for a very long time, while commodities are simply too new for us.

A couple of years ago we undertook hedge fund research and then decided to use funds of funds for hedge fund purposes. But we only invest in the safer hedge funds, in other words hedge funds of funds bond proxy style as opposed to equity-like hedge funds.

It was the new EU occupational pensions directive that paved the way for our hedge funds investments because we were not able to do this before under Swedish law. Now we have the so-called traffic light system whereby the Swedish finance authorities carry out a risk evaluation on us, meaning that the portfolio needs to undergo a stress test to see whether we are able to take on the volatility risk in times of rising or falling interest rates. But as long as you have a surplus with regard to your liabilities you are fine.

And as long as we think the asset class is structurally good over the long term, short-term volatility is not an issue. We are long-term orientated with a 100-year cash flow. So short-term volatility - sharp movements of up to six months - is included in our expectation of an annual return of 6-8%. And apart from this year, the bond proxy hedge funds have met our expectations.

To reduce the volatility risk we optimise the whole portfolio, in other words we do not look at specific asset classes on their own but look at how they behave in the portfolio with all of the assets.

We started with a 5% allocation in hedge funds and have not changed it so far. But we may increase that exposure over the next two years.

In our new strategy we do not discuss hedge funds as such; instead we discuss either bond proxy or equity hedge funds. First, we decide about the allocation between equities and fixed income and then within the respective areas hedge funds have to compete with other fixed income or equity investments.

I do not expect us to be investing in other alternatives, for example commodities, over the next few years, but it may come up in discussions during our annual strategy reviews.

Commodities have just appeared on Swedish institutional investors’ radar screens but to my knowledge no one has done any in-depth research of them so far. Other alternatives such as infrastructure and forestry have so far only attracted marginal interest in comparison to other alternatives.

We are typically representative of Swedish pension funds with regard to asset allocation. However, many others also invest in private equity as part of their alternative universe.

Jan van Beek, manager, finance and investment, at PMA, the Dutch pension fund for pharmacy employees, which has AUM of €1.1bn

In the Netherlands alternatives include, for instance, commodities, private equity, infrastructure, currency alpha funds and
hedge funds. Real estate is widely regarded as a separate asset and usually does not fall into the alternatives category. However, agricultural real estate is mostly seen as an alternative investment.

Currently we are investing 17% in real estate, mainly in non-listed pools, but PMA has no direct investments in buildings. In addition, 50% of our portfolio is in equities, 30% in fixed income and 3% in cash.

We do not have any exposure to alternatives currently, but according to our investment policy we do have the possibility of taking up alternatives. We have already investigated many opportunities and expect to invest in alternatives in the course of 2008.

Our investment guidelines set a maximum exposure of 5% of our total assets in alternatives and 21% in real estate. Apart from that, we are quite happy with our current asset allocation and there are no plans to implement major changes.

However, it is likely that our policy to make social responsibility an important element in the decision-making process will increasingly have an impact on our portfolio.

We achieve diversification of our portfolio through our investments in real estate and cash as well as through diversification within the different asset categories. We have been investing in European real estate for about 10 years now and the average exposure in this period has been around 15-18%.

Particularly over the past few years real estate returns have been very good, achieving 26% in 2006, 19% over the three-year period and 16% over the five years to last year.

But with slowing economies in some of the invested regions, we expect returns in the coming years to be lower than we have seen recently, although they will remain attractive. In line with the expectations of some fund managers, we expect real estate returns of around 8-10% annually, maybe a little bit less for some funds.

Real estate assets are not as volatile as equities but are more volatile than fixed income assets. In general, however, they do not carry a very large volatility risk, with the exception of listed real estate funds.

Most pension funds in the Netherlands, especially the mid-size and the bigger pension funds, will have a similar exposure to real estate. And in particular, unlike us, large Dutch pension funds will also have invested in alternatives.