Pension Fennia is a mutual company,
which manages statutory
earnings-related pension insurance in
Finland. Its current assets total around
5bn.
The company has been investing in
hedge funds for more than two years
and currently around 2% of the total
portfolio is invested either directly or
through funds of hedge funds.
Pension Fennia moved into hedge
funds for two reasons – to reduce its
dependence on fixed income and to
enhance returns. Asset allocation is
heavily skewed, with 12% of the portfolio
invested in real estate, 20% in equity
and the rest in fixed income.
Eeva Grannenfelt, director of capital
markets at Pension Fennia, says hedge
funds have helped to correct this
imbalance somewhat: “ We considered
that the fixed income position was a bit
too heavy and we wanted to stabilise
the position so that it was not so
exposed to interest rate risk. So assets
were moved from fixed income to the
hedge fund.”
Pension Fennia started in a small way
with an allocation to hedge funds of
less than 1%. “Once you have decided
that you need to invest in that asset
class you have to start somewhere
because the learning process is very
long,” says Grannenfelt.
The aim is to steadily increase the
allocation, she says. The more relaxed
regulatory climate will help. At the end
of last year, the Finnish Financial
Supervisory Authority introduced new
regulations that allow Finnish pension
funds to allocate up to 5% of their portfolios
to hedge funds provided certain
criteria are met.
“Obviously our target is at least to use
what the authorities allow us at the
moment,” she says.
After two years of investing in funds
of hedge funds, as well as individual
funds, Pension Fennia has decided it
needs to take a more targeted
approach, says Grannenfelt.
“When you start investing in hedge
funds it is easy to think that once
you’ve picked a fund of funds that’s all
you have to do. But we don’t consider it
that way. We consider picking funds is
a much more difficult process than
that.”
Pension Fennia chooses hedge fund
managers itself, with some external
advice. “We find picking funds
extremely difficult, because there are
thousands of hedge funds, some of
them very good. At the moment we pay
very high fees to hedge funds and we
can only trust in the managers we have
chosen.”
The company is now in talks with
hedge fund advisers and consultants,
and is looking for a permanent partnership
with one or two, says Grannenfelt.
“We have already been using some
advice, but we need a more structured
arrangement than we have at the
moment. We need a particular type of
consultant to help us do the due diligence,
to look after the risk return profile,
and to follow up with the hedge
funds.”
In particular, she says, the Pension
Fennia investment team wants to be
more closely involved in hedge fund
style management: “In different market
situations in different market situations
certain types of funds perform
better than others. If you pick a fund of
hedge funds it’s often very difficult to
tell what your risk return profile is
going to be
“For us, style management is as critical
as picking the fund. We want to be
absolutely sure that we hat we understand
and have a good knowledge of
style management.”
Pension Fennia does not separate
hedge funds from traditional assets in
the overall management of its portfolio.
“In many cases if it is an equity
type hedge fund our equity people will
be involved, and if it is a more fixed
income orientated strategy our fixed
income people will be involved.”
Hedge funds have not performed as
well as expected, Grannenfelt says. “In
the first year performance was a bit
better than expected, but last year
obviously it wasn’t very good.”
Yet hedge funds have done the job
Pension Fennia expected to do. “Obviously
we are a bit worried that too
much money is pouring in to these
funds. But by helping us to diversify
more and more, hedge funds have
enabled us to meet our annual return
target.”

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