(February 5, 2014) — The Danish pensions regulator, the FSA, has spoken of its concern about investors’ risk attitudes towards alternatives.
Danish funds have invested €152 billion in alternative investments, according to the regulator, placing greater demands on companies’ ability to assess risk.
Pension funds have been driven into expanding their alternatives allocation by several years of low interest rates in Denmark and Europe. Typically, they are investing in private equity, alternative credit, infrastructure, agriculture, and hedge funds, the watchdog said.
Around 7% of Danish pension funds’ portfolios are estimated to be in alternatives today, and the majority of funds are expected to increase that allocation, according to the FSA’s research.
However, the five largest investors have a combined share of 60% of all asset owners’ investments in alternatives. The largest 10 asset owners make up 90% of all alternative institutional investments in Denmark.
“The general impression is that the companies generally assess the relationship between risk and return on alternative investments,” said Deputy Head of the FSA Carsten Mygind Feldt.
“We believe, however, that some companies have tended to assess whether there is sufficient liquidity premium, and ensure that they adequately relate to uncertainty about the valuation of investments, for example, through sensitivity analysis.”
The FSA’s report said it believed the skills required to identify, monitor, control, and report the risks are higher for alternative investments—particularly with customised investments where the underlying asset is unique.
Although these types of investments can produce greater levels of return, only the largest and most sophisticated funds have the resources to make those sorts of investments, the FSA said.
The regulator has pressed investors to analyse correlation and political risk more closely, and ensure an accurate valuation of the assets. It was also worried investors were not concerned enough about concentration risk.
The regulator was also worried investors were not concerned enough about concentration risk. “It is expected that the [investors]…look at the underlying assets when investing, so that infrastructure funds, for example, are not treated as private equity,” the report said.
Having assessed the state of the market, the FSA warned it will now renew its focus on alternatives and ramp up its inspections.
The full report (in Danish) can be found here.
Related Content: Alternatives Reach Over $6 Trillion in AUM in 2013 and Danes Turn to the Great Outdoors for Stable Returns