Hedge funds vie for a place on alternatives smörgåsbord

 The market has been flooded with mutual funds but now the prime concern is on the following factors:-

There are now signs that investors are giving up trying to identify hedge fund alpha and re-classifying them as “alternative” beta. “Many institutions do group hedge funds into low-risk and high-risk categories, with the low-risk a replacement for bonds or treasuries,” says Mr Nilsson. “My experience is that many of them have sold off bonds, but didn’t want to take on equity risk, so Graal is one of the hedge funds that can be bought as an alternative.”

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AP7 recently reclassified its funds of funds as fixed income allocations, simultaneously halving positions to 2 per cent. Where it can, the fund is creating “pure alpha” mandates, which involve no capital allocation that can be subject to “beta-leakage”, instead forcing managers to create their own liquidity from short positions.

“The paramount reason for us to be in alternatives is to provide a more efficient portfolio from an asset/liability management perspective,” said Dan Bergman, head of risk allocation at the IQPC Forum. “It’s not unusual to find they represent real assets, and therefore act as an inflation hedge. On a stand-alone basis they offer competitive risk-return characteristics compared to traditional investments, often because of the liquidity premium we can access through them, and we would especially like to increase our exposure to this liquidity premium.”

Alongside property, private equity looks set to benefit most from this shift to alternative beta and longer-duration assets. AP7 tripled its private equity as it halved its hedge fund exposure, and Mr Gröttheim wants to see its 6 per cent allocation grow to 10 per cent over the next few years; and the Länsförsäkringar Alliance of insurance companies is set to almost double its property and private equity investments up to 25 per cent of its assets, having stripped hedge funds from its portfolio in 2005-06.

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 This is a small country, and that forces companies to aim for success internationally. So there are a lot of excellent family-owned companies, and compared with Germany, say, they are much more open to letting other owners in.” There is a rather punishing tax regime, but Robert Andreen, chairman and founding partner of buyout firm Nordic Capital, prefers to focus on the fact that Sweden’s efficient and transparent markets facilitate acquisitions, and that there is still sufficient juice to be squeezed from improving industrial operational efficiencies to preclude over-reliance on financial engineering to produce returns.This positions Swedish buyout quite favourably for the post-credit contraction environment.

“The local players can be much more pro-active in this climate than over the past two years,” says Mr Andreen. “For example, we have seen in Denmark, where Nordic Capital and EQT have very strong, pro-active teams, a distinct upturn in the number of deals where that approach, almost creating the deals, has been very successful.”

But the signs are that when they turn to alternatives now, Swedish investors are more convinced by what private equity offers in the longer term, beside property, commodities and other real assets, than they are by hedge funds.