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Hedge Funds – Nobel Foundation’s Alternative to Fixed Income

Report: Systematic Strategies

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Stockholm (HedgeNordic) – In the world of remarkable legacies, few names stand out like Alfred Nobel, the Swedish inventor, scientist, and philanthropist who left much of his fortune to establish the Nobel Prizes. More than a hundred years have passed since the first Nobel Prizes were awarded, and yet, their prestige has only increased with time. Behind this enduring tradition stands the Nobel Foundation, a private institution entrusted with the responsibility of safeguarding Alfred Nobel’s vision and ensuring that his prizes continue to honor those who have made profound contributions to humanity.

Since 2017, in her role as Chief Investment Officer, Ulrika Bergman has been charged with overseeing the Nobel Foundation’s financial stewardship and asset allocation. As Bergman reveals, the Foundation’s approach to asset allocation involves building a well-diversified portfolio with a long-term perspective. The investment strategy is not just about preserving wealth but also growing it in a way that supports the Nobel Prizes’ mission. “We have a pretty basic strategic asset allocation framework, where the starting point is Alfred Nobel’s will,” Bergman tells HedgeNordic.

“We have a pretty basic strategic asset allocation framework, where the starting point is Alfred Nobel’s will.”

“The will states that the Nobel Prizes should be funded by the returns from investments in what he refers to as safe securities,” says Bergman. As per the will, the Nobel Foundation is entrusted with safeguarding the foundation’s asset base, ensuring the long-term financial stability of the prizes. “His will has been translated into our statutes and, over the years, the interpretation of what constitutes safe securities has evolved because he did not explicitly define that in his will,” elaborates the Nobel Foundation’s CIO. The current goal for the Nobel Foundation is to generate three percent real returns annually, allowing for a margin to cover the costs of giving out the prizes, research for the prizes, and the overall administration.

Asset Allocation Framework

“Our main goals are to achieve a real return above three percent and to safeguard the assets, with eternity as the horizon,” notes Bergman. Given that starting point, the Nobel Foundation’s portfolio management relies on a basic strategic asset allocation framework, encompassing investments in various asset classes such as equities, hedge funds, fixed income, and real assets. Bergman and the investment committee use a number ofexternal sources for forecasting of expected returns, risk, and correlations for each asset class to build the basis for their strategic allocation.

“Our main goals are to achieve a real return above three percent and to safeguard the assets, with eternity as the horizon.”

Tasked to safeguard the Nobel Foundation’s assets and achieve a relatively modest return target, Bergman emphasizes that getting their return projections right in each asset class is of secondary importance. “Being right on the diversification and correlation characteristics of our asset allocation is more important.” Even so, the Nobel Foundation’s investment capital rose by 7.5 percent annually over the past five years, comfortably achieving its return target. 

Hedge Funds as Replacement for Fixed Income

At the close of 2022, the Nobel Foundation had 53 percent of its SEK 5.5 billion investment portfolio allocated to equities, 22 percent to hedge funds, 17 percent to fixed-income assets and cash, and 9 percent to property and infrastructure. Between one-third or one-half of the fixed-income allocation sits in cash and cash equivalents, leaving about 10 percent for fixed-income instruments, such as foreign corporate credits, Swedish fixed income, and unlisted bond funds.

“For a long time, fixed income has only accounted for ten percent of our strategic asset allocation, which made sense given the low-rate environment.”

“For a long time, fixed income has only accounted for ten percent of our strategic asset allocation, which made sense given the low-rate environment,” Ulrika Bergman tells HedgeNordic. Bergman has spent most of her tenure as CIO of the Nobel Foundation in a low-interest-rate environment since joining in 2017. “We have maintained both a low allocation to fixed income and very low duration in this portfolio, which made sense given the low rates.”

As an alternative to the low-yielding fixed-income assets, the Nobel Foundation has maintained an industry-unusual strategic allocation of 25 percent to hedge funds. “Our 25 percent allocation to alternatives essentially comprises hedge funds, serving as replacements for fixed income with a risk-return profile between fixed income and equity risk.”

“Our 25 percent allocation to alternatives essentially comprises hedge funds, serving as replacements for fixed income with a risk-return profile between fixed income and equity risk.”

The Nobel Foundation had SEK 1.2 billion allocated to hedge funds at the end of 2022, with this hedge fund portfolio returning 26.1 percent during 2022 in terms of Swedish kronor. With the hedge funds based out of the United States and maintaining U.S. dollar exposure, part of that return stemmed from the weakening of the Swedish krona. The return was still impressive at 11.0 percent in U.S. dollar terms. This follows a return of 12.0 percent in 2021 in terms of Swedish kronor.

With the fixed-income opportunity set arguably more attractive than at any point in the past decade or more, the Nobel Foundation may contemplate moving a portion of its hedge fund portfolio to fixed income. “Given the fact that we thought about our hedge fund portfolio as a partial substitute for fixed income, we might reduce this allocation, but at the same time, we have generated strong returns from our hedge fund portfolio,” argues Bergman. “We still need to weigh the pros and cons of each asset class.”

“I still believe that hedge funds could provide good diversification in the face of swift changes in trends and quick market turns.”

“The swift move into higher rates all over the world makes fixed income more attractive,” elaborates Bergman. At the same time, it also makes sense to extend the duration of the fixed-income portfolio, as a longer duration may offer diversification benefits. “To reduce the hedge fund allocation is not something we have decided or see as necessary at this stage, because our portfolio has been able to generate good returns and diversification benefits,” emphasizes Bergman. “I still believe that hedge funds could provide good diversification in the face of swift changes in trends and quick market turns. They are the quickest ones to react and that helps.”

Hedge Fund Manager Selection

The Nobel Foundation relies on external managers for exposure to all asset classes. Its hedge fund portfolio of SEK 1.2 billion comprises four different managers, who primarily employ a multi-strategy approach. “We are a small organization, well-known but small in terms of resources,” says Ulrika Bergman. “So we try to be very selective in all asset classes and choose managers with a long track record, strong reputation, responsible investing policies – those who tick all the boxes for a high-quality manager.”

“Given our focus on the multi-strat approach, we don’t need to shift between different strategies. We prefer to leave that decision to our managers.”

Given its relatively constrained capital and human resources, the Nobel Foundation mostly tends to invest in the multi-manager, multi-asset space, favoring “big hedge fund shops with thousands of employees who are more likely to have a comparative advantage in terms of both resources, information, data, systems, tools.” The focus on the multi-strategy, multi-manager approach also obviates the need to switch between different hedge fund strategies, which may be performing differently in varying market conditions. “Given our focus on the multi-strat approach, we don’t need to shift between different strategies. We prefer to leave that decision to our managers.”

The market environment of the decade before the Covid pandemic had not been particularly fertile for many hedge fund strategies due to low-interest rates, limited dispersion, and muted volatility resulting from central bank stimulus. Bergman sees a more favorable environment for hedge funds amid higher volatility. “Skilled hedge fund managers are good at finding shorter-term trends or mispricings in the market, which happen more frequently in volatile markets,” concludes Bergman.

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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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