Gunther Schiendl, head of investments at APK Pensionkasse

For Günther Schiendl, head of investments at Austria's €2bn-plus APK Pensionskasse, investing in alternatives is as much about what you don't put into your portfolio as what you do.

"We have never invested in funds of hedge funds. We are not convinced by the investment process. A lot of hedge funds are being paid not for active management, but for over-diversification. Using a fund of hedge funds manager is certainly an expensive way of diversifying," he says. He dismisses arguments about getting access to critical capacity. "There are hedge fund of fund managers who are going for a more active management process, and that might be a worthwhile service, but we don't feel its worth paying 2 and 20 just for securing capacity."

Instead, the group focuses on single hedge fund investments, with absolute return strategies making up about 10-15% of a typical plan's assets within APK.

However, absolute return does not include extension strategies. "What we've learned is that absolute return strategies seem to suggest a risk profile that is by and large money market but able to return 200 to 300 basis points over money market rates. That is very difficult, and maybe even unrealistic. So we believe it's better to go for more active or risky strategies. The other thing we have seen recently is a 2 and 20 fee schedule for absolute return funds, which are money market plus a little bit extra. It's been our experience that absolute return funds aren't really worthwhile." However, APK's single strategy approach has had mixed results. Because the Pensionskasse has stringent requirements about seeing a manager's track record before investing, it is restricted in its timings. "Sometimes we get the feeling that we waited too long, and once we started investing, performance, which had been excellent, started to degrade," says Schiendl.

Performance for absolute return is up 1.5% this year, and Schiendl points out that it is much simpler to allocate more to money markets, with rates at 4%. He also believes that APK's approach of combining different investment processes of its single strategies - so investing in a long/short strategy combined with a directional play, for example, did not work out. "Our other experience has been that if the investment processes are mixed, it is not as good as a single strategy," he points out.

APK has had much more success with its real estate portfolio, which varies across its plans but is roughly 3-5% of total allocation. Real estate has returned about 6% over the year to date. However, APK only makes direct investments. "We feel that the REIT market is over priced, and is behaving more like equity than like real estate," says Schiendl. He dismisses arguments that REITS bring much needed liquidity to the asset class. "We believe the argument about liquidity in property is similar to that of private equity. We need to make sure in advance that we can afford for some of our investments to be illiquid."

In fact, private equity makes up less than 1% of APK's investments. Schiendl says it is partly to do with the fact that there have always been regulatory constraints limiting the group's exposure, and also because there simply isn't enough spare capacity for the asset class. What little allocation there is, however, is focused on value creation, and not on the buy-out sector.

APK's contrarian approach has helped it considerably in recent months. It was buffered from the sub-prime crisis because it stayed away from structured notes. "We haven't been doing ABS or CDOs partially because we did not fully understand them and partially because did not believe that something that is not investment grade and a little bit structured suddenly becomes investment grade."

And Schiendl's use of derivatives to hedge against market risk means that it avoided some of the price correction which occurred in mid-June and August, by hedging a third of its equity portfolio in mid-June. "Its not really complicated to use a future. You just need to have people who know what a future is and how to use it, he says.

The group has also shied away from long only commodity investments, because "you have to deal with backwardation and contango and that might change as money pours into the market".

On an average plan level, APK is returning 7% plus year to date.

Paul Spijkers, chief investment officer of global alternative products at ABP

At €215bn, ABP is Europe's largest pension fund, and a heavy hitter in alternatives. The Dutch giant invests across hedge funds, private equity, commodities, and real estate, with mixed results in the first half of this year. Hedge funds returned 8.5% at half year 2007, real estate underperformed, returning
-1.9%, and private equity was the most successful with an 18.2% out performance.

Like Danish fund APK, the fund shies away from hedge funds of funds. "We try to keep our fund of hedge fund exposure as limited as possible. We try to avoid that double layer of fees," explains Paul Spijkers, chief investment officer of global alternative products. Instead, hedge funds are managed by its New York quantitative team and by New Holland Capital, a spin-out of its Dutch team. Despite spinning out the business however, New Holland Capital is not open to other investors.

"New Holland Capital does not take on third parties because it would dilute their attention to other clients and that would only be detrimental to us. Seeing as we have a strategic allocation of close to $10 billion, we'd like to keep liquidity to ourselves," explains Spijkers.

The fund's strategy is to stay away from typical hedge fund products.

"There are certain hedge fund strategies that have become so mainstream that they aren't delivering their original returns. If you want to have a continuous hedge fund portfolio as a source of return, you have to constantly be on the look out for new products rather than common types of hedge fund strategies."

Spijkers points out that strategies have to be as low beta as possible to common market factors like
volatility, and says that only 15% of the fund's returns can be explained by common market factors, as opposed to 70-80% on most hedge fund

Meanwhile, real estate makes up 9% of the portfolio. "We have found that you can get the same exposure and the same risk/return components by investing in listed and non-listed real estate investments. You avoid dealing with operational and real estate management issues."

The majority of ABP's US portfolio is invested in real estate investment trusts (REITs) while non-listed investments are bigger than listed fund investments in Europe, because value added opportunistic real estate is usually found in the non-listed area - although ABP is working towards 50% listed and 50% unlisted - explains Spijkers.

Real estate under performed because of the adverse month of June, and the sub-prime mortgage crisis, and rising interest rates. Private equity has given the fund the most reason to celebrate, returning 18.2% over the half year. "If you look at the numbers in private equity, it's quite important to be able to select the top quartile general partners," says Spijkers, pointing out that there have been a lot of studies that compare private equity index returns to the S&P, finding that returns are comparable. Those studies are probably all correct, suggests Spijkers, because they encompass the whole of the industry, rather than the top players, who add significantly more performance.

Meanwhile, Spijkers is keeping an eye out on the buy-out market. "The market has changed in the sense that more and more parties are focused on mega leveraged buy-outs. That in itself raises a number of issues and we're still looking at what this means." Private equity assets are managed exclusively by AlpInvest, owned jointly with the PGGM fund. In June, ABP and PGGM gave AlpInvest a €500m mandate to invest in innovative, clean technology, partly, says ABP, because it fits in with its sustainable approach, and partly because it will reduce investment risk.

ABP has also made its first foray into timber. "We decided that the risk return characteristics of timber were such that it would make sense to add it to the portfolio," says Spijkers. He expects to see returns of around 6% from the asset class.

Commodities make up 3% of total allocation, and most of it is passively managed. ABP has just started to invest in farmland as part of this portfolio, because land generates wealth, as do the incomes and commodities it provides, through a specialist fund set up especially for the Dutch plan.