DENMARK – The big project at Denmark's DKK794bn (€106bn) ATP pension fund to re-think the separation between its alpha and beta investments is likely to reach the implementation stage in the next few months.

CIO Henrik Gade Jepsen told IPE: "It's something we're working very hard on, and I think it's going to take place within months."

Within its investment portfolio, the pension fund split alpha and beta investments into two distinct business operations six years ago, but it is now partially reversing that move.

The investment portfolio accounts for 42% of ATP's overall assets, while most of the vast fund forms a hedging portfolio designed to prevent changes in interest rates from stopping ATP meeting its pension commitments.

The alpha part of the investment portfolio has been managed by hedge-fund subsidiary ATP Alpha.

In December, ATP announced it would reorganise this unit, possibly halving staff levels and bringing it closer to the rest of the investment portfolio.

Gade Jepsen told IPE the realignment currently underway was a big project.

"We're still in the process of setting it up," he said, adding that there were no plans to seek new external managers for parts of the investment portfolio.

The project could be seen as reuniting alpha and beta, he said.

"The old way of seeing things was that alpha was what you generated through active management and beta was what you gained by being exposed to the market," he said. "Our thinking today is more that the beta universe has broadened.

"Beta is what you get by being exposed to a number of risk factors, whereas alpha is the returns you can't explain by these risk factors. The beta universe is expanding and the alpha universe is shrinking.

"A lot of exposures that used to be considered alpha is actually exposure to a risk factor, so many things thought of as alpha are really beta."

Whenever investment is carried out according to a formula, this is beta, he said.

So some traditional hedge fund strategies such as convertible bond arbitrage and merger arbitrage are in fact beta, he said.

Having redefined some alpha strategies as beta, it no longer makes sense to run them in two separate portfolios, he said.

Given the new thinking, the level of cost involved in ATP Alpha's way of working has also become an issue.

The subsidiary has been organised as several small teams investing independently as separate hedge funds.

"It has been quite expensive to run it like that, and it also had the disadvantage that it was difficult to scale," Gade Jepsen said.

Some of the hedge fund strategies are being axed, and some will be realigned.

"If we had 10 strategies before, for example, we might only use four or five of these going forward, but we will make these work and scale them according to ATP's total risk budget.

"Our goal is not to reduce ATP Alpha's contribution. Alpha has set up an extremely well-functioning investment platform, and we want to run this in the future on a different scale."

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