Nordic investors are looking to increase their alternatives holdings, but their hands are tied by regulation. Angele Spiteri Paris speaks to fund managers about investor appetite...
Research found that almost 50% of Scandinavian investors will be allocating more capital to hedge funds in 2010, but not everyone agrees that the appetite for alternative asset classes is that strong in Nordic countries.
Research from Preqin, a research and consultancy firm focusing on alternative asset classes, says: “Scandinavian investors are optimistic about the long-term prospects of the hedge fund market. Forty-six per cent are looking to increase their allocation to hedge funds and 44% will be keeping their exposure the same.”
However, Kirstein Finance, a Nordic consultancy firm, produces a yearly, in-depth survey of institutional investors in the Nordic countries, and over the last couple of years it has found that although Nordic investors had been interested in hedge funds and alternatives, their experience was soured by the crisis.
Jan Willers, head of financial market research at Kirstein Finance, disagrees with Prequin. Regarding the possibility of an increased interest in hedge funds, Willers says: “The interest for hedge funds decreased a lot in 2009 and investors will probably be somewhat reluctant about this asset class this year as well.”
In 2007 the interest in alternatives had been so great that Kirstein ran a separate survey, concentrating specifically on these asset classes. And in 2008 the JP Morgan Alternative Asset Survey identified that Nordic investors will allocate approximately €32bn of new investment to alternative assets over the next two to four years.
But the story seems to have changed somewhat.
Willers says: “Although there is more focus on risk assets, the take-up will be quite slow. As a result of the unsavoury returns generated in 2008, many investors will be very cautious.”
Some think that investors in the Nordic region would rather miss an opportunity than take the risk of losing more than they already have. They are happy playing it safe.
But some fund managers in the industry think differently.
Lars Kallholm, head of Nordic markets at UBS Global Asset Management, says: “There is now much more momentum for investor thinking to move in favour of hedge funds. There has been demand for alternatives all across the spectrum of strategies – single-manager hedge funds, funds of hedge funds and even volatility products.”
According to a survey by Pyramis Global Advisors, a Fidelity Investments subsidiary, 29% of Nordic pension plans aim to increase their hedge fund allocation over the next one to two years, while 22% aim to increase their private equity investments.
The survey found that 26% of Nordic institutions will most likely or definitely diversify into alternatives as a way to manage volatility.
Further, Peter van Berlekom, head of Swedish and Nordic equities at Nordea Investment Management, says: “There has been a small uptick in retail demand for hedge funds.” Indeed, a number of other players suggested the appetite for alternatives is currently more pronounced in the retail market, since they can afford to be more agile than an institutional investor.
However, in spite of the small increase in demand, van Berlekom says: “The message we want to send to clients is that they would do well to have balanced funds in their portfolio, rather than too many alternative asset classes.”
But Kjell Norling, head of global fund distribution at SEB Wealth Management, agrees with the view that alternatives will thrive. He says: “I’m sure we will see more allocation to risk – unless the business cycle changes suddenly.”
Steen Jorgensen, head of Nordic institutions at Alliance Bernstein, says: “There is more demand for alternative investments… in fact we are expanding our offering of alternative assets in response to the demand.” Jorgensen says that one strategy that is gaining traction is a liquid currency alpha service.
The fact that the product garnering the most interest is a liquid one is telling, though. It shows that although Nordic investors’ interest in alternatives is piqued, their criteria around such investments have changed.
Norling, of SEB, says: “For institutional investors cost is an issue. Pension funds have a difficult job trying to cover all asset classes and therefore they’re being very careful about risk.”
Kallholm, of UBS, says that the way allocation decisions and investments in alternatives are made now will not be the same as they were before the crisis.
He says: “The crisis taught that investors need to know deeply what they’re investing in and need to understand the strategy and, last but not least, the operational standards involved.”
Jorgensen, of Alliance Bernstein, says: “Investors do need to know what they’re buying now. They really want to get into the operational detail of these alternative strategies and have a more rigorous due diligence process.”
Taking their time
As a direct result of this added care, Norling, of SEB, says: “The decision-making process is taking longer than it did before the crisis, because institutional investors want to first make sure that they are happy doing business with that particular company.”
Kallholm, of UBS, says: “Some investors have begun taking longer to appoint a manager as, after all, you have to consider that an RFP [request for proposal] does not contain everything an investor would want to know. It’s about really knowing the company and the people managing your assets, and being comfortable that its commitment is secure.”
Albin Rosengren, partner and head of sales at East Capital, says: “There has been a greater focus on the investment process but there is now greater attention being given to operations, systems and compliance procedures. Also, at the peak of the financial crisis the financial stability of managers was also being looked at.”
But in spite of the seemingly high interest in alternative asset classes, investors in the Nordics cannot necessarily act on this appetite.
In all the Nordic countries investors have a capped limit of alternatives exposure they can have in their portfolio.
Willers, of Kirstein Finance, says: “The cap on risky assets forces investors to be very selective. Since they only have a small amount of money to allocate to alternative asset classes, they need to make sure that the type of investment suits their portfolio.”
But the problem is that investors actually would like this limit to be increased (see pension fund interview on pages 28-29).
Jorgensen says: “Many investors want to increase their allocation to alternatives, but they are prevented from doing so because of the regulatory restrictions.”
Kallholm says he knows that institutional investors’ hands are tied when it comes to alternatives exposure, but he adds: “Our policy makers are quite knowledgeable regarding this issue and when markets have stabilised and the operational excellence is better than it was in the past I would be surprised if the regulators didn’t increase the alternatives weighting for these institutions. As long as you do your ex-post studies on what went wrong I think this can lead to a recovery for alternative strategies.”
The fallout from the crisis has seen global investors flock to emerging markets and Nordic investors are no exception.
Kallholm says: “Regardless of client segment, developing countries seem to be quite high up on the list of preferred investments. The whole world is keeping its fingers crossed for the emerging market countries to rescue us this time because the odds don’t seem likely that the US or Europe will be leading us out of the crisis.”
Norling says: “You’ve started seeing allocations coming through and pension funds showing interest and investing. There is a lot of opportunity in these regions.
“You may wonder whether it’s a new bubble being formed. Regardless of whether it is, the long-term case for investing in emerging markets is still strong.”
According to the Pyramis survey, 46% of Nordic pension plans aim to increase their exposure to emerging market equities.
Another alternative asset class that looks like it’s making a comeback in the Nordics is real estate. Norway’s sovereign wealth fund made a 5% allocation to the asset class, with the mandate beginning in the second week of March. And the investment giant may very well inspire other investors to follow its lead.
Kallholm says: “We are seeing a growing demand for different kinds of real estate. The asset class seems to be back, or at least it is on investors’ radars more than it was in recent times.”
Norling says: “The demand is not so high at this point in the business cycle but in the corporate market you will see demand increasing. Property is hedged to inflation so if you have dividends and a secure return, then that area can offer quite a good investment.”
Pyramis’s survey in fact showed that 40% of Nordic institutional investors plan to increase their allocation to real estate or private property.
Futhermore, Colliers International’s Nordic Real Estate Review in autumn last year showed that a number of large property deals were transacted in the Nordic markets.
These included the acquisition of a portfolio of 20 retail properties worth DKK113m (€15.2m) by a private company in Denmark, the acquisition of a fully let CBD office by the Swedish institution AMF from a German open-ended fund and the sale of a portfolio of four retail properties in Helsinki and Tampere, for €50m.
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