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The Hedge Fund Cure for Apoteket’s Pension Fund

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Stockholm (HedgeNordic) – 2022 was one of the toughest years in recent memory for institutional investors, as the global economy and financial markets faced high inflation, rising interest rates and volatility. Apotekets pensionsstiftelse, the pension foundation managing the €1.16 billion pension assets of Swedish pharmaceutical retailer Apoteket, was one of the pension funds that managed to come out of 2022 unscathed and book a positive return of 1.0 percent. Hedge funds did their part, both last year and the past five years.

The performance of Apoteket’s Pension Fund last year reflects spot-on strategic asset allocation decisions in recent years, as well as – atypical – shorter-term-focused tactical trades. The pension fund managed by CIO Gustav Karner had a higher-than-usual level of protection in the portfolio already at the end of 2021 through well-timed tactical exposure to equity put options and the U.S. dollar. Last year’s positive performance comes on the heels of a 12.6 percent return in 2021 and an annualized return of around 6.3 percent over the past five years.

While the shorter-term tactical asset allocation decisions partly explain the pension fund’s positive return in 2022, the solid longer-term return stems from Apotekets pensionsstiftelse’s strategic asset allocation approach. The strategic asset allocation decisions led Karner to increase the exposure to absolute return strategies from around ten percent in 2017 to 39 percent at the end of 2021, when the hedge fund allocation stood at about three times the equity exposure adjusted for the put options.

Asset Allocation Approach Favored Hedge Funds

Every autumn, CIO Gustav Karner and his colleagues in the investment committee make strategic asset allocation decisions for the Swedish state-owned pharmacy retailer’s pension fund. The investment universe spans a wide range of asset classes such as equities, investment and non-investment grade fixed income, private equity, real assets, and absolute return strategies – mostly hedge funds.

“We sit down with our investment committee and analyze expected returns, risks, standard deviations and correlations for all these asset classes over the coming five years,” explains Karner, who is in charge of running Apoteket’s Pension Fund. “We use all these metrics as input in our proprietary asset and liability management (ALM) model, which helps us decide on the most appropriate strategic asset allocation given our liabilities.”

“…we mainly looked at absolute return strategies and hedge funds as a substitute to low-yielding fixed-income instruments, especially investment grade.”

“Interest rates were very low when I joined Apoteket’s pension fund as CIO back in 2017, and our ALM model indicated that investments in low-yielding fixed-income investments would not be enough,” recalls Gustav Karner. “We had to find other asset classes to meet our objectives, so we mainly looked at absolute return strategies and hedge funds as a substitute to low-yielding fixed-income instruments, especially investment grade,” he continues. “The fixed-income space, mainly investment-grade and government bonds, was providing return-free risk, and huge downside risk coupled with very low returns.”

Under the helm of Karner, who was already accustomed to hedge fund investing after serving as CIO of Sweden’s Nobel Foundation, Apoteket’s Pension Fund started building up its portfolio of absolute return strategies and hedge funds. “I have been investing in hedge funds for at least 20 years and know some of the really good hedge funds, especially since my times at the Noble Foundation,” says Karner. “The strong investment committee at the Nobel Foundation had very good connections to the world’s best hedge funds,” recalls Karner.

Apotekets pensionsstiftelse’s allocation to absolute return strategies increased from ten percent at the end of 2016 to 16 percent at the end of 2017 and 39 percent at the end of 2021. “I started as CIO in 2017 and managed to build up a portfolio that suited my convictions by 2019. From 2018, the hedge fund portfolio has returned around 11.7 percent per year and contributed to around half of the broader portfolio’s 6.3 percent return,” explains Karner. In 2022 alone, the hedge fund portfolio returned 6.3 percent in local currencies. With all investments hedged to the Swedish krona, the hedging trimmed just one percent of the hedge fund portfolio’s return.

Manager Selection

“When I started at Apoteket, I simply tried to invest in the best hedge fund managers and did not pay too much attention to targeting exposure to specific strategies,” Karner explains his manager selection approach. “We have been trying to find the best managers and invest in them because they are often closed,” he elaborates. With inflation concerns looming in 2021 and expectations about central banks’ more aggressive tightening measures to fight inflation, Karner and the investment committee veered toward a more tactical approach to strategy selection in the hedge fund portfolio. “We saw inflation coming in 2021 and saw the need for the Fed and other central banks to aggressively fight inflation, so we moved quite a lot of capital to trend-following CTAs,” says Karner. “We hadn’t invested in CTAs before, that allocation helped us a lot last year.”

“Multi-strategy funds probably suit us better compared to other types of strategies.”

Apoteket’s Pension Fund allocates capital to a diverse set of hedge fund strategies, including niche strategies run by managers out of Sweden. Karner relies on a quantitative multi-asset portfolio risk and investment decision-making tool to assess the suitability of each hedge fund investment in the broader portfolio. “This tool helps us find and invest in hedge funds that complement our portfolio quite well.” Over time, Karner has arrived at the conclusion that “multi-strategy funds probably suit us better compared to other types of strategies.” Similarly, he does not see too many added benefits from long/short equity strategies in the broader portfolio due to their beta to equity markets.


While the fight against inflation may have started to pay off, central banks will likely continue their efforts as core inflation has yet to peak in many countries. For that reason, Gustav Karner does not yet foresee a very bright outlook for economies and financial markets just yet. “It is more difficult for the Fed and other central banks to fight inflation,” says Karner. “Core inflation has come down a little bit in the United States, for instance, but not very much,” he continues. “The Fed will need to do more to fight inflation, so the U.S. economy may end up in a recession.” As a result, the equity allocation at Apoteket’s Pension Fund still remains relatively low at around 12.5 percent following “good results for the last five years.”

“Since yields are more attractive, we may start reallocating some capital from hedge funds to fixed-income instruments.”

After a long drought, the higher interest-rate environment is turning bonds into a more attractive allocation. “Since yields are more attractive, we may start reallocating some capital from hedge funds to fixed-income instruments,” says Karner. Hedge fund strategies, however, they can also benefit from higher short-term interest rates, according to the CIO. “In this environment, we will continue to keep CTAs in the portfolio as downside protection should conditions turn much worse,” says Karner. “But we also expect multi-strategy hedge funds to navigate the environment well because they can move around the exposure to different strategies depending on where they see more value.”


This article features in HedgeNordic’s Nordic Hedge Fund Industry Report.

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Eugeniu Guzun
Eugeniu Guzun
Eugeniu Guzun serves as a data analyst responsible for maintaining and gatekeeping the Nordic Hedge Index, and as a journalist covering the Nordic hedge fund industry for HedgeNordic. Eugeniu completed his Master’s degree at the Stockholm School of Economics in 2018. Write to Eugeniu Guzun at eugene@hedgenordic.com

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