Stockholm (HedgeNordic) – Since Peter Ragnarsson assumed the role of Head of Alternatives at PRI Pensionsgaranti in 2015, the Swedish pension insurer has significantly increased its allocation to alternatives from 12 percent to about 45 percent. With Ragnarsson overseeing allocations across all alternative asset classes spanning private debt, private equity, infrastructure, real estate, and hedge funds, PRI has chosen to collaborate with LGT Capital Partners to manage its ten percent target allocation to hedge funds.

PRI currently allocates approximately 45 percent of its SEK 37 billion investment portfolio to alternative asset classes. This allocation includes between 15 to 20 percent in private debt, 10 percent in real estate, eight percent to hedge funds, and an equal three percent to private equity and infrastructure, respectively. “During my eight years at PRI, we have increased the allocation to alternatives quite a lot,” reiterates Ragnarsson. “We are a very small team and I am still the only one responsible for covering all alternative asset classes from hedge funds through all private markets,” he elaborates. “I spend more and more of my time on the private markets portfolio, which takes a lot of time.”

“During my eight years at PRI, we have increased the allocation to alternatives quite a lot.”

Due to limited human resources, PRI Pensionsgaranti has partnered with LGT Capital Partners to manage its ten percent target allocation to hedge funds. “Even though hedge fund investment is my bread and butter, my area of expertise, I felt that I had less time to be an active allocator in hedge funds,” Ragnarsson explains the rationale behind this decision. “We believed it was a good opportunity and timing to seek a partner to assist us in this area.” As part of this collaboration, PRI has established a fund structure of a fund-of-one with LGT Capital Partners, where PRI is the sole investor and LGT Capital Partners serves as the investment manager.

As part of this partnership, PRI Pensionsgaranti is raising its allocation to hedge funds from eight percent to its long-term target of ten percent. Ragnarsson explains, “We slightly increased the allocation now, as we believed it was the opportune time to reallocate to that level while entering this partnership.” With PRI Pensionsgaranti managing an investment portfolio valued at SEK 37 billion, approximately $3.5 billion, the pension insurer initiated a $300 million mandate with LGT Capital Partners at the beginning of December.

“The benefit for me in this setup is that I can still maintain control of the portfolio – deciding what goes in and how we allocate – while leveraging the entire infrastructure, research team, and resources provided by LGT.”

The allocation process entails LGT Capital Partners proposing allocations and new funds to Ragnarsson, with PRI’s Head of Alternatives making the final decision on all allocation matters. “The benefit for me in this setup is that I can still maintain control of the portfolio – deciding what goes in and how we allocate – while leveraging the entire infrastructure, research team, and resources provided by LGT,” explains Ragnarsson. “LGT is a prominent hedge fund allocator and also offers favorable fee rebates with many approved funds on their platform, from which I can also benefit,” he notes. “Moreover, they are significant investors through SMAs or managed accounts, which enhances the cash efficiency of the portfolio.”

This partnership also allows Ragnarsson to take a more dynamic and active approach to PRI’s hedge fund allocations. “We can scale up and down the allocation to certain strategies more tactically than before,” he explains. “Previously, our approach to the hedge fund portfolio was more passive, characterized by a buy-and-hold strategy where we allowed profits to run,” Ragnarsson elaborates. “With this new arrangement, we can be more active in cashing in profits and be more tactical in our allocation decisions.”

Strategy Exposure Reshuffle

Before partnering with LGT Capital Partners, PRI Pensionsgaranti aimed to maintain an “all-weather” hedge fund portfolio. “The portfolio consisted of a combination of systematic strategies such as CTAs and systematic macro, and higher Sharpe ratio type of strategies like fixed income relative value, long/short credit, discretionary macro, and equity market-neutral,” explains Ragnarsson. “It was a combination of both.”

PRI’s primary goal of investing in hedge funds has been to capture a reliable source of absolute return, uncorrelated to other asset classes in the portfolio such as equities and fixed income. “That has been the primary objective of the hedge fund portfolio,” says Ragnarsson. “If we could also derive some tail protection characteristics from the allocation, that’s beneficial, but it was not as prominent before as it will be now with the new manager lineup,” he elaborates. PRI will continue to adopt an “all-weather” approach to this portfolio but with a greater emphasis on systematic strategies and tail protection strategies.

“Overall, we beefed up the systematic side of the portfolio.”

“We have beefed up the lineup within trend-following CTAs, added exposure to short-term trading CTAs, and introduced two systematic macro funds, which were previously not part of our exposure,” says Ragnarsson. PRI also allocated to a new artificial intelligence machine learning fund. “Overall, we beefed up the systematic side of the portfolio,” he adds. “Those managers tend to be better at capturing, for lack of better words, crisis alpha, and protecting the portfolio during more stressed market conditions. I believe the characteristics of the hedge fund portfolio are the main reason for allocating more towards these strategies.”

“Those managers tend to be better at capturing, for lack of better words, crisis alpha, and protecting the portfolio during more stressed market conditions.”

While multi-PM hedge fund platforms have gained popularity among institutional investors in recent years, Ragnarsson has chosen to steer clear of these large platforms. “I prefer to construct my own multi-strategy approach in that regard. We prefer single strategies or specialists,” says Ragnarsson. “We have a combination of smaller, emerging managers in our portfolio and we also have some other large, established names as well,” he continues.

Ragnarsson places significant emphasis on stable teams, track records, and effective risk management, among other factors, when selecting managers. “In essence, we prioritize stable teams with a proven track record,” notes Ragnarsson. “If it’s a newer fund, they should have a track record from a previous employer or a team that I am familiar with, demonstrating the ability to generate alpha and continue to maintain these alpha-generating characteristics.”

Solid Performance and Fertile Environment

Solid performance from its hedge fund allocation in recent years has been a key factor motivating PRI Pensionsgaranti to maintain a significant allocation to this asset class. “We have been satisfied with the performance of this portfolio, which is why we are one of the few local institutional investors that have retained a sizable allocation to hedge funds in recent years,” says Ragnarsson. “While we experienced a couple of flat years around 2018 and 2019, our hedge fund portfolio has delivered strong performance over the past few years.” 

“…I believe that the current environment is good for investing in hedge funds moving forward.”

According to Ragnarsson, the current market environment has become more favorable for hedge funds. “Given the prevailing environment characterized by higher interest rates, as well as increased volatility and dispersion in the markets, hedge funds are well-positioned to thrive,” concludes Ragnarsson. “I am glad that we have maintained our allocation during these years, despite facing some questions about cost considerations as a hedge fund allocator,” he elaborates. “However, we have weathered through that and I believe that the current environment is good for investing in hedge funds moving forward.”