Soon after Kari Vatanen joined Finnish pension insurer Elo as Head of Asset Allocation and Alternatives, he praised the team behind the firm’s hedge fund portfolio and its long-term performance. Mika Jaatinen, who manages the allocation alongside Antti Vartiainen, explains how Elo constructs its hedge fund portfolio, how it continues to evolve, and the role it is expected to play amid structural changes in the Finnish pension system.

Elo’s hedge fund allocation stood at around 10 percent at the end of 2025. According to Jaatinen, hedge funds “play the classic role of diversification away from equity and bond risk.” However, diversification alone is not sufficient to justify an allocation. “Returns are extremely important. How can you rationalize investing in hedge funds without returns?” he asks.

“[hedge funds]play the classic role of diversification away from equity and bond risk. Returns are extremely important. How can you rationalize investing in hedge funds without returns?”

Mika Jaatinen

While Finnish institutional investors are generally active allocators to hedge funds, Jaatinen emphasizes that portfolios vary significantly across institutions. Each hedge fund allocation is designed differently and serves a distinct role within the broader portfolio. “Everyone has their own strategy based on their balance sheet,” he explains, noting that hedge fund allocations are ultimately designed to deliver something specific, whether enhanced returns, improved diversification, or a particular risk profile. Every investor, he says, “can use the hedge fund allocation to achieve something extra they want to see in the balance sheet.”

Balance Sheet-Driven Allocation, Not a Bond Substitute

While some Nordic allocators have used hedge funds as a substitute for low-yielding fixed income during the low-rate environment, Mika Jaatinen and the team at Elo took a different view. They did not consider hedge funds to be well positioned in a low interest rate environment. “Some strategies are so cash-heavy that they lost the carry component when rates were low,” notes Jaatinen. As a result, hedge funds were never viewed as a substitute for low-yielding investments, but rather as a distinct allocation with its own return requirements within the portfolio.

“How the portfolio should look and what kind of profile it should have is decided at the CIO level, and that has been the driving force in our case.”

Mika Jaatinen

Instead, the role of hedge funds within Elo’s broader portfolio is defined by the profile set at the CIO level. “How the portfolio should look and what kind of profile it should have is decided at the CIO level, and that has been the driving force in our case,” explains Jaatinen. Based on that framework, Jaatinen and his colleague determine which strategies and managers are best suited to meet those objectives. The portfolio is subsequently adjusted on a gradual basis, typically over multi-year cycles, to better align its allocation with the CIO’s evolving requirements.

Pension Reform and Capital Efficiency

This approach is now being tested by structural changes in Finland’s pension system. A reform of the earnings-related pension model allows for increased equity exposure. “The equity weight will increase by five percent and then again a year later,” Jaatinen notes, raising the question of how the remaining 30-35 percent of the portfolio should be structured.

With less room for other asset classes, allocations to hedge funds, real estate, and fixed income are expected to decline somewhat. The next question, he notes, is one of capital efficiency. “How can you allocate capital to a given asset class in the most efficient way, ensuring that all capital is fully utilized and generates the best possible returns?” One of the approaches being considered is the use of separately managed accounts (SMAs) within the hedge fund portfolio, where feasible.

“Obviously, you could establish SMAs with some managers to steer the allocation in a more capital-efficient way and better meet the portfolio’s objectives.”

Mika Jaatinen

“Obviously, you could establish SMAs with some managers to steer the allocation in a more capital-efficient way and better meet the portfolio’s objectives,” says Jaatinen. The challenge, however, lies in implementation. Many Finnish institutional investors already have long-standing hedge fund portfolios, with significant allocations to some of the world’s most established managers. “Those managers are not particularly willing to set up SMAs for clients, so it’s not something you can easily push through,” he explains.

One possible way forward could be to build relationships with newer managers that may be more open to such structures. “But it’s difficult to say how much this will develop going forward,” Jaatinen adds. “It’s just one possible direction.”

A Slow-Moving Portfolio Built Around Access

Most Finnish pension funds, including Elo, already have mature hedge fund portfolios with long-standing manager relationships. “All Finnish pension funds have fairly seasoned portfolios, with manager relationships that in some cases go back more than a decade,” says Jaatinen. “There is already a core portfolio in place that is quite close to the desired profile.” As a result, portfolio construction today is less about broad reallocation and more about incremental improvement.

Rather than positioning the portfolio around a specific market environment or trying to identify the best-performing strategy at a given point in time, Jaatinen describes the process as gradual and iterative. “It’s more like a slow-moving wheel or train, where you are slowly taking some elements out and adding others, with the objective of improving the portfolio over time,” he says.

“All Finnish pension funds have fairly seasoned portfolios…There is already a core portfolio in place that is quite close to the desired profile.”

Mika Jaatinen

The overall profile of the hedge fund portfolio is defined at the CIO level, with the portfolio management team then determining the allocation across strategies, sub-strategies, and managers to achieve that profile. Different strategies can therefore serve distinct roles within the portfolio. 

“Some strategies, such as macro, can provide strong diversification to the balance sheet, while equity long/short can be used to increase equity exposure,” explains Jaatinen. “If you want a more relative value stance, you might overweight market-neutral equity or multi-strategies,” he adds, outlining how different approaches are used depending on the objective. “We use certain managers for specific purposes to reach that overall profile,” he continues. “When you look at the portfolio as a whole, you are continuously adding or adjusting elements to improve it and match that target profile as closely as possible.”

Defining Quality and Scaling Constraints

Regardless of the strategies employed, Mika Jaatinen and his co-portfolio manager place strong emphasis on partnering with high-quality managers. “The name of the game today is really a chase for high-quality managers,” he says. For Jaatinen, quality is defined by a combination of experience, process, and discipline.

“A high-quality manager is someone who has gone through different market cycles and has seen it all,” he explains. Equally important is robust and transparent risk management. “They need to have very strong risk management and be able to clearly explain their processes,” he adds. A clearly defined and repeatable investment process is another key requirement, alongside a highly experienced portfolio manager or team. Ultimately, the defining characteristic is consistency. The stability of both the investment process and the risk management framework is what distinguishes high-quality managers over time.

“The name of the game today is really a chase for high-quality managers. It’s extremely hard to allocate to certain high-quality managers, some of which have been closed to new investments for 10 or 15 years.”

Mika Jaatinen

Another important selection criterion is the size of assets under management. “We have become so large, and our allocations have grown accordingly, which means our minimum ticket sizes have increased as well,” explains Jaatinen. Given Elo’s scale and portfolio construction requirements, engaging with smaller managers is often not feasible. “When you are operating at this level, you tend to partner with managers that are fairly large themselves,” he adds.

Jaatinen acknowledges that “it’s extremely hard to allocate to certain high-quality managers, some of which have been closed to new investments for 10 or 15 years.” This makes it challenging to construct a portfolio with precise allocations across specific strategy buckets. Rather than compromising on quality, he prefers to remain patient. “If we are not able to access the best-in-breed managers, then we just wait or remain underweight in that part of the portfolio,” says Jaatinen, underscoring a clear preference for quality over completeness.