SWEDEN - Pension funds are seeking out alpha/beta separation strategies as a hedge against an equity market downturn and fall in interest rates, which could see them slapped with a "red light" under the Swedish Financial Supervisory Authority's traffic light system.
The Finansinspektionen (FI) introduced the traffic light system – a stress test of the financial risks of supervised institutions – at the beginning of the year.
While less than 1% of assets landed in the red under the first quarter’s solvency assessment, fluctuations in the country’s interest rate swap curve, as reported by Global Pensions in April, have forced funds to find ways to optimise their alpha and beta exposure.
Industry sources said pension funds were showing interest in moving a portion of their international equity into a portable alpha product, and flagged this up as a trend growing forward.
Gunnar Balsvik, president, Kåpan Pensioner, said his fund was moving away from active equity mandates and instead using equity calls to increase its exposure to the asset class: “We’re working on a swap solution with one counter party right now. The benefit is we’re taking away some of the downside risk on the equity market... we think we have a better risk/return profile by using equity calls.”
He added: “[Traffic light] systems incentivise you to use derivatives instead of traditional allocation.”
Silva El Hayek (pictured), business development executive, Nordic region, at T. Rowe Price in Stockholm, said: “Portable alpha and/or other derivatives instruments give these institutions access to a combination of the long term attractiveness of the equity and bond market and at the same time reduce the interest rate risk and/or the equity risk.”
She continued: “Swedish institutions who need to meet the FI requirement for mark to market valuations of their pension fund liabilities are shifting part of their assets from a traditional equity, fixed income, alternatives asset allocation to one consisting of a liability hedge of risk-mitigating portfolios that match plan duration, and an investment portfolio of reliable return generating active managers.”
Although not covered by the traffic light system, Richard Grottheim, executive vice president at the SEK66bn AP7 is an advocate of alpha/beta separation, and has in the past called for more products to aid pension funds in this regard.AP7 has been trialling alpha/beta separation since January this year in the hope that it will prove a more cost-efficient way of managing capital over the long term.
Additionally, Byron Baldwin from futures and options exchange Eurex’s business development team told Global Pensions earlier this year that portable alpha strategies were “the new paradigm” in institutional investment management.
Although not everyone in the industry agrees. Jan Bernhard Waage, MD and CIO at Wassum in Sweden, said: “We see a handful of clients trying to do something in the alpha/beta separation area but we find that even the bigger clients find it too hard to get reliable returns, so we don’t see it’s a foreseeable way forward.”
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