Gustav Karner, Chief Investment Officer of Apoteket’s Pension Fund since 2017, has delivered one of the highest Sharpe ratios among Sweden’s largest institutional investors, despite operating with significantly fewer resources than larger peers. A key contributor to this strong risk-adjusted performance has been his substantial allocation to hedge funds, which now account for roughly one-third of the €1.2 billion portfolio.

“Hedge funds have contributed quite a lot to this performance over the years,” says Karner. “We have benefited significantly from the hedge fund portfolio.” Reflecting this conviction, the benchmark allocation to hedge funds was increased from 30 to 35 percent during 2025. Despite this above-average allocation, Karner emphasizes that the hedge fund portfolio contributes relatively little to overall portfolio risk, given his focus on high-quality managers delivering low volatility in returns and strong Sharpe ratios.

“We have benefited significantly from the hedge fund portfolio.”

Gustav Karner, Chief Investment Officer of Apoteket’s Pension Fund.

From Bond Substitute to Strategic Allocation

Karner has been investing in hedge funds for more than two decades but significantly increased the allocation after joining Apoteket’s Pension Fund, using hedge funds as a substitute for low-yielding fixed income in the prevailing low interest rate environment. “The main purpose when I started here at Apoteket nearly nine years ago was to use hedge funds as a substitute for low-yielding fixed income instruments,” Karner explains.

“The portfolio has delivered average returns of over 10 percent per year, which have been more attractive than traditional fixed income. That’s why I decided to maintain the allocation.”

Gustav Karner, Chief Investment Officer of Apoteket’s Pension Fund.

Importantly, Karner has maintained this allocation even as interest rates have risen, having been satisfied with the portfolio’s performance across different market environments. “The portfolio has delivered average returns of over 10 percent per year, which have been more attractive than traditional fixed income,” he adds. “That’s why I decided to maintain the allocation.”

While the hedge fund portfolio’s contribution may be less visible in risk-on environments that favor equities, hedge funds have proven especially valuable during drawdowns. In risk-off episodes such as 2022, the allocation played a stabilizing role. “For example, in 2022 both bonds and equities fell quite sharply, but the hedge fund portfolio held up. We generated over 6 percent currency hedged from hedge funds that year,” recalls Karner.

Bottom-Up Manager Selection and Portfolio Construction

Despite his experience operating in a typically top-down role as a chief investment officer across various institutions, Karner constructs the hedge fund portfolio using a distinctly bottom-up approach focused on identifying the highest-quality managers. “We definitely take a bottom-up approach, trying to find the best managers,” he notes.

This philosophy has resulted in a well-diversified portfolio across strategies, including credit, long/short equities, fixed-income arbitrage, and, importantly, multi-strategy funds. Access remains a key constraint, as many of the preferred managers are capacity-constrained. “It’s crucial for us to identify very strong managers, and if they fit the portfolio, we try to invest, although many of them are often closed or soft-closed to new capital,” Karner adds.

“We definitely take a bottom-up approach, trying to find the best managers. It’s crucial for us to identify very strong managers…”

Gustav Karner, Chief Investment Officer of Apoteket’s Pension Fund.

Karner prefers to maintain a relatively concentrated hedge fund portfolio of around a dozen managers. “We have 14 managers today, and I think that’s a good balance. You don’t want it to become too complex, but you still need sufficient diversification,” he explains. Given the lean structure of the organization, this level of diversification is considered optimal.

A key screening criterion is a consistently high Sharpe ratio, with a target of above 2 at the fund level. “We place a strong emphasis on risk-adjusted returns,” Karner notes. If expected returns drift toward the mid-single digits, the investment case quickly weakens, particularly when factoring in currency hedging costs. “If it’s a U.S. fund and you need to hedge the dollar, you can end up with returns that are comparable to fixed income,” he notes.

“If you make changes over time and are even slightly better than average at selecting hedge funds, you will retain the good ones and replace the weaker ones. That’s how you build a stronger portfolio over time.”

Gustav Karner, Chief Investment Officer of Apoteket’s Pension Fund.

He views active portfolio rotation as essential to maintaining quality over time. By systematically exiting weaker performers and reallocating to stronger managers, the overall portfolio will be gradually improved. “If you make changes over time and are even slightly better than average at selecting hedge funds, you will retain the good ones and replace the weaker ones,” Karner explains. “That’s how you build a stronger portfolio over time.”

Strategy Preferences: Long/Short Equity and Quant

Karner sees a more compelling opportunity set for long/short equity strategies in today’s higher interest rate environment, where increased dispersion creates a richer backdrop for stock selection. “I believe long/short equities are more interesting now than before, and we are starting to see this reflected in performance as well,” he says.

Over the longer term, however, he has grown increasingly interested in quantitative strategies. Within this space, Karner occasionally allocates to trend-following CTAs, though these are not a core holding due to their historically lower Sharpe ratios. A tactical allocation at the end of 2021 proved well-timed ahead of the segment’s strong performance in 2022, although dispersion across managers limited the overall impact. “One CTA performed well, but another did not perform as strongly, but the overall contribution from the fund was positive,” he notes.

Preference for Scale, Stability, and Institutional Quality

When evaluating managers, Karner places strong emphasis on quality, scale, infrastructure, and track record. Typically, he invests in managers with at least $1 billion in assets under management. “We want managers with sufficient scale to withstand difficult environments and maintain operational stability,” he explains. Institutional robustness, including strong balance sheets, operational infrastructure, and administrative capabilities, is a prerequisite. “They should have everything in place: stable funding, a strong balance sheet, and a well-functioning operational and administrative setup.”

“The best hedge funds know their value, and they know there is strong demand from investors wanting to allocate to them.”

Gustav Karner, Chief Investment Officer of Apoteket’s Pension Fund.

This naturally leads to competition for access. Karner acknowledges that access to the highest-quality managers is highly competitive, often resulting in less favorable terms for investors, such as longer lock-ups and higher fees. “The best hedge funds know their value, and they know there is strong demand from investors wanting to allocate to them,” he says. As a result, managers are able to dictate terms. “They can extend lock-up periods and adjust fee structures, which is not ideal from an investor’s perspective,” Karner notes. “But ultimately, you still want to be invested with the best managers.”

The Importance of Relationships in Accessing Top Managers

Securing allocations to top-tier hedge funds is largely relationship-driven. Karner highlights the importance of long-standing industry connections. “It’s all about relationships. I’ve known several founders for 15 to 20 years, and that makes a difference,” he says. Despite being a relatively small institutional investor, Apoteket’s Pension Fund remains one of the largest allocators to hedge funds in dollars in Sweden. The fund’s profile also works in its favor.

“It’s all about relationships. I’ve known several founders for 15 to 20 years, and that makes a difference.”

Gustav Karner, Chief Investment Officer of Apoteket’s Pension Fund.

As a Swedish corporate pension foundation, it is viewed as a stable, long-term capital provider. “Managers tend to prefer investors like us over, for example, fund-of-funds structures, because they see the capital as ‘sticky’,” Karner explains. “At the same time, they want to diversify their investor base, and many of them don’t have other Swedish pension funds as clients.”

As a Stockholm-based investor, Karner does screen local hedge funds and occasionally invests in them, but the bar for inclusion is high. For Nordic managers to earn a larger allocation, they must meet the same stringent criteria as global peers. “They need to demonstrate better performance, lower risk, and higher Sharpe ratios overall,” he says.

“There are some strong funds in Stockholm and the Nordic region, but they are generally not at the same level as the very best globally.”

Gustav Karner, Chief Investment Officer of Apoteket’s Pension Fund.

Scale and organizational stability are also key considerations, with a preference for established teams and long track records. “There are some strong funds in Stockholm and the Nordic region,” Karner notes, “but they are generally not at the same level as the very best globally.”