The financial world received a shock recently when CalPERS, a Californian pension fund with assets amounting to more than 200 billion euros, announced it would eliminate its hedge fund programme, taking 4 billion euros out of the game.
Hedge funds are portfolios of investments managed aggressively to generate high returns regardless of the market situation. They are expensive, and reducing costs was one reason behind CalPERS's decision to ditch them.
Finnish pension funds had more than 11 million euros invested in hedge funds at the end of June. Despite the high cost of these funds, Finnish pension companies are not planning to follow in the footsteps of the Californian pension giant.
"We've been happy with the returns. In relation to price fluctuations, the returns have been extremely good," says Reima Rytsölä, the chief investment officer at Varma pension fund. Of the Finnish pension companies, Varma has the highest amount of money invested in hedge funds, around 6.6 billion euros.
CalPERS is not the only company to bemoan the high costs of hedge funds. Rytsölä admits that investing in hedge funds does not come cheap, as the funds take a 15-20 per cent cut of all returns exceeding the target, plus a two-or-three-per cent fixed fee. So out of every extra euro they earn, the investors pay 20 cents to the fund.
Varma alone has paid hedge funds hundreds of billions of euros in fees over the past decade.
"This of course makes for a juicy topic for the media but the costs must be discussed in relation to returns. Over the same period, the funds have made us billions of euros," says Rytsölä.
Returns, on average
Over the last five years, hedge funds have generated returns of 10.5 per cent on average for Varma, after the costs, while CalPERS achieved returns of around 5.6 per cent over the same period.
On average, pension funds gained returns of 8.1 per cent for their investments in hedge funds, 19.5 per cent for investments in shares and 2.1 per cent for investments in the interest rate markets.
Funds are expensive because they provide investors with a pivotal service. An expected rate of return of 3.5 per cent after inflation has been set as the goal for Finnish pension companies' investments, a target which has become increasingly difficult to achieve as central banks have been injecting new money into the economy to the tune of thousands of billions of euros.
"Hedge funds are extremely important because we must get returns for our investments from somewhere. Currently, there is no profit to be made on the interest rate markets. With hedge funds, we are looking for lower risks than those involved in the stock market, and they also give higher returns than the credit market," explains Rytsölä.
The head of the tactical asset allocation at the Ilmarinen insurance company, Staffan Sevón ,says that investments with high returns and moderate risks are extremely hard to come by at the moment.
"The low expected rates of return make it inevitable that we'd turn to other investments, for example hedge funds." While Ilmarinen has invested more than 400 million euros in hedge funds, it also manages its own hedge fund, Ilmarinen Alfa.
Stable returns
When the financial crisis hit the markets, the value of hedge funds did not drop as dramatically as stock prices, and since then they have generated stable returns, while profits from stocks have fluctuated.
"I'm not saying we shouldn't discuss the costs but we must also look at the returns in relation to risks. And based on our figures, these returns are good," Rytsölä explains, summing up the benefits.
According to The Financial Times, capital from pension funds accounts for 36 per cent of around 2,400 billion euros invested in hedge funds.
Although things have changed since the times when funds were only for the rich, it is still easy to regard hedge funds as top money earners managed by the superstars of the financial world.
And it is not difficult to understand why people might have this notion: last year the earnings of the 25 best-paid fund managers totalled 19 billion euros, according to the financial newspaper Forbes. The top funds give returns of up to 30 per cent year in, year out.
Sevón says that these figures do not reveal the whole picture.
"Some of the fund managers do behave like rock stars of the investment sector but if you make investments expecting huge returns you either get disappointed or take huge risks."
Paavo Teittinen – HS
Niina Woolley – HT
© HELSINGIN SANOMAT
Image: Vesa Moilanen / Lehtikuva
