Since taking the helm as Chief Investment Officer of Apoteket’s Pension Fund in 2017, Gustav Karner has guided the €1.22 billion pension foundation to become one of Sweden’s top-performing pension funds. Delivering an annualized return of 7.1 percent over the past five years with low volatility, Apoteket’s Pension Fund has defied conventional wisdom in asset management. Instead of relying heavily on equities, Karner has strategically integrated hedge funds as a core pillar of the investment strategy.

The pension fund’s low equity exposure – targeting 12.5 percent in public equities and 10 percent in private equity – is a deliberate strategic choice driven by its sponsor’s preference for stability. “Our sponsor, Apoteket, doesn’t like high volatility in the portfolio,” explains Karner. Despite this cautious approach, Apoteket’s Pension Fund delivered a strong 9.1 percent return in 2024, with all asset classes contributing to performance, including private equity, fixed income, and hedge funds. “Most parts of the portfolio performed well last year, and especially we had great performance from private equity, where we have significant exposure to venture capital,” Karner notes. “Our investment-grade fixed-income portfolio also delivered solid results, largely because our manager did a great job and outperformed the benchmark by a wide margin.”

Although equities represent a relatively small allocation in Apoteket’s Pension Fund, they contribute significantly to the portfolio’s overall risk. “That’s how it should be, because our private equity portfolio has been the best-performing asset, with equities coming in second,” says Karner. Over time, the equity portion – both public and private – typically accounts for around 75 percent of the portfolio’s total risk.

Hedge Funds: A Cornerstone of the Portfolio

The combination of strong returns and low volatility for Apoteket’s Pension Fund can partly be attributed to Karner’s allocation to hedge funds. “In terms of returns, our hedge fund portfolio isn’t far behind, and it makes up a significant part of our allocation,” he explains. As of the end of last year, hedge funds accounted for 37.2 percent of Apoteket’s Pension Fund’s portfolio. “If you look at our entire hedge fund portfolio, it returned 11.8 percent last year, and we now have 28 consecutive months of positive performance.”

Karner’s approach to building the hedge fund allocation centers on selecting high-quality managers running strategies capable of achieving Sharpe ratios above two. His selection process follows a clear priority: first identifying “really, really good and high-quality managers” before evaluating whether their strategy aligns with the portfolio’s objectives. Explaining what defines a top-tier hedge fund manager, Karner emphasizes consistency and resilience: “We look for managers with very few down months and down years. We want them to have a Sharpe ratio of above two, and we prefer those with a long track record.”

“We look for managers with very few down months and down years. We want them to have a Sharpe ratio of above two, and we prefer those with a long track record.”

Karner also favors hedge fund managers and strategies with a substantial amount of assets under management. “It’s also very important that they have a well-known auditor and a reputable administrator,” he elaborates. “We also want them to work with a well-known custodian bank. As part of our due diligence, we often reach out to the auditor, custodian bank, and administrator to verify that they are indeed clients, ensuring we get a true picture of their operations.”

Karner focuses on identifying top-tier managers with strong risk-adjusted returns before considering their strategy fit within the portfolio. “First of all, we focus on finding really good managers, we don’t start by looking at strategies,” he explains. “Once we identify a high-quality manager, we then see if there’s a way to invest, as some of the best managers are closed to new investments.”

Strategy Mix Favoring Multi-Strats

Apoteket’s Pension Fund currently holds 12 hedge funds, with Karner favoring multi-strategy managers. “It really depends on how you define multi-strategy, but about 70 percent of our portfolio consists of multi-strategy managers,” he explains. However, he notes that some of these managers exhibit biases toward certain strategy styles, even though they are still categorized as multi-strategy funds. While Karner primarily allocates to multi-strategy funds, he also sees value in standalone strategies, including trend-following CTAs.

Karner appreciates trend-following CTAs for their ability to deliver so-called crisis-alpha but does not view them as a strategic long-term allocation in the portfolio. “We currently have no allocation to CTAs. However, if we observe a challenging environment for equities or foresee a crisis—though it’s hard to predict—we may reconsider,” Karner explains. “Everything feels expensive right now, and when things are expensive, it increases the risk of investing. We like CTA hedge funds, especially when equities and fixed-income instruments lose value, as they tend to perform well in such environments,” he adds. “That said, we don’t want them as a long-term part of our allocation because their Sharpe ratios are often too low.”

“We aim to find and invest in hedge funds with low equity beta and low beta to the fixed-income market because we want them to function as a separate asset class, delivering solid performance even when other asset classes struggle.”

He favors strategies with minimal exposure to equity market risk and low beta to fixed income. “We don’t have too much long/short equity, nor do we want too much fixed-income arbitrage and similar strategies,” Karner adds. “We aim to find and invest in hedge funds with low equity beta and low beta to the fixed-income market because we want them to function as a separate asset class, delivering solid performance even when other asset classes struggle,” he explains. This resilience was particularly evident in 2022, one of the most challenging years for institutional investors in recent memory, when Apoteket’s Pension Fund still managed to post a positive return of 1 percent. 

While Karner seeks hedge fund managers capable of achieving Sharpe ratios above two, he does not necessarily prioritize those targeting exceptionally high absolute returns. “We don’t aim for very high returns. We typically look for hedge funds targeting returns of around 10 percent, ideally between 8 and 12 percent,” Karner notes. He avoids funds targeting 25 to 30 percent returns, as they often come with higher risk. “A more stable return profile not only reduces risk but also improves diversification within the portfolio,” Karner adds.

Beyond a Fixed-Income Replacement

When Karner took on his new role at Apoteket’s Pension Fund in 2017, following a similar position at the Nobel Foundation, he saw hedge funds as a replacement for fixed-income investments in a low-rate environment. “I viewed hedge funds as a way to maintain a stable portfolio without being overly reliant on the very low yields from fixed income,” Karner recalls. “That’s why I began building the hedge fund portfolio as a substitute for the fixed-income allocation. Over time, it’s proven to be even more effective,” he emphasizes. A prime example of this came in 2022, when both equities and bonds experienced losses, yet the hedge fund portfolio delivered a solid return of 6.3 percent.

“I viewed hedge funds as a way to maintain a stable portfolio without being overly reliant on the very low yields from fixed income. Over time, it’s proven to be even more effective.”

“So, it has proven to be even better than a substitute for fixed-income instruments,” Karner notes. “That’s why we’ve gradually built it up, and it’s now a larger part of our portfolio. However, we’re quite satisfied with the current allocation.” With hedge funds now making up about 37 percent of the portfolio, Karner adds, “We don’t feel the need to increase the allocation further.” Despite not planning to expand the hedge fund allocation, Karner remains on the lookout for promising funds. “We’re always looking for interesting funds, whether by identifying them ourselves or by consulting other investment managers to see where they’ve found good opportunities.”

This article is part of HedgeNordic’s “Nordic Hedge Fund Industry Report.”