Hedge Fund Failures Prompt $39 Billion Swedish Investor to Cull

(Bloomberg) -- One of Sweden’s biggest pension funds has chosen to rely less on hedge funds after deciding the asset management form generally doesn’t justify the extra expense.

After using hedge funds “for a long period,” AP3, which has 345 billion kronor ($39 billion) in assets under management, has “recently reduced the exposure,” according to Marten Lindeborg, chief investment officer at the Stockholm-based fund.

“In the past 15 years, they have delivered 2 percent a year,” he said in an interview. “That’s not very fantastic when the T-bill rate has returned 1 percent in the same period. And the correlation between the hedge fund index and the S&P 500 has been 0.75. So, there is a very low diversification contribution to have hedge funds if the correlation is that high.”

At the end of 2017, AP3 was using seven hedge funds, including two global macro funds and two credit funds. (It didn’t provide the names of the firms). Designed to provide a backstop to Sweden’s public retirement coffers through its use of diversification, AP3 invests in a wide array of assets including private equity, infrastructure and property. It’s returned 5.7 percent a year since its inception in 2001.

Lindeborg says the hedge funds that AP3 still uses “have delivered a good return” and are considered a “strategic partner.” Even so, AP3 “won’t allocate a big part of the fund to hedge funds because of the track record and the fee structure. But the hedge funds we hold also give added value in the form of research and insightful discussions about the market.”

More broadly, there are signs that hedge funds are losing out to private equity firms when it comes to managing institutional money, amid concerns that years of extreme monetary stimulus have left stocks and other highly liquid assets overvalued.

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In May, hedge funds returned 0.8 percent on average, on an asset-weighted basis. The best performance was among equity funds, who delivered 2.1 percent. Macro strategies were the worst, losing 0.3 percent.

“You see the success stories and read about them,” Lindeborg said. “But you don’t see the broad mass of failures. Very little is written about them. It’s difficult for me to see that hedge funds will be a big part of AP3. Based on their track record and fee structure, hedge funds have a lot to prove.”

At the same time, Lindeborg says AP3, like many other institutional investors, is looking into increasing its presence in illiquid assets such as infrastructure.

“A lot of institutions like ourselves -- sovereign wealth funds and pension funds -- are really hunting these assets,” he said. “That means that the pricing on these has also increased.” And with the asset class growing “expensive,” Lindeborg says AP3 “won’t rush to this area.”

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