Was 2011's Most Successful Hedge Fund Actually a Pension?

(February 2, 2012)  —  Where would you find one of the largest and most sophisticated hedge funds on the planet? One that made an investment return of over 20% in the tumultuous markets of 2011. New York? London? Hong Kong?

Hillerød, a small city of 30,000 people some 30 minutes north of Copenhagen, would not spring instantly to most people’s mind.

Most people, however, have not heard of ATP, the Danish fund manager that looks after the assets of the country’s public pension system.

Over the last, chaotic 12 months, through a complex system of hedges, levers and ‘risk buckets’, Chief Executive Lars Rohde and his team have steered some DKK778 billion – around €104 billion – through the headwinds of the Eurozone crisis and beyond.

Rohde has been at the helm of ATP since 1998 and has overseen much of its transformation into an alpha-seeking, risk managing, public sector quasi-hedge fund.

Good humoured, happy to chat with typical Scandinavian perfect English, Rodhe is not afraid to speak his mind.

In 2008 he told me that the European pensions industry needed something like the potential game-changing regulation Solvency II, which was initially formulated for insurance companies, to get them thinking about funding and liability matching.

At the time, he was a lone voice. This does not seem to have changed.

Fast forward four years or so, and Rohde still stands out from the crowd. The strategy ATP runs is more like that of a hedge fund than a pension plan. The portfolio is divided between return-seeking assets and a collection of hedges designed to protect the scheme in all economic weathers.

Last year the investment portfolio made a 20% return. The aggregate hedge fund return over 2011 was a negative 4.9%, according to hedgefund.net.

When I spoke to him about these results published this week, Rohde, in typically understated tones said: “Yes, I suppose we had quite a good year.”

ATP’s results bear out the long-term success of its risk-aware approach. In 2005, it made an investment return of just over 6%, in 2006 around 4.2%, and in 2007, 2%. A 6% loss in 2008 was followed up by a return of 4.3% in 2009 and 6.8% in 2010.

All this time the hedging portfolio has managed to maintain, if not improve, the already 100%+ coverage ratio of its liabilities.

Out of habit, I ask him about what asset classes worked well in 2011? He laughs and says: “Liz, you know it’s not about the asset classes, but the risk allocation…”

The investment portfolio has five ‘buckets’ which are invested according to a risk budget, rather than a propensity for a certain asset class.

I ask him why so few others take this ‘risk allocation’ approach, at least in pension investing.

“I’ve been wondering that too for many years,” he says, laughing.

“Maybe it’s a case of bad habits, maybe peer pressure. As John Maynard Keynes said: ‘It’s better to fail conventionally than to succeed unconventionally’. As long as people are being seen as doing what they are meant to be doing, for some of them that’s the correct behaviour.

“As they used to say: ‘no one gets fired for hiring IBM’.”

Over the past decade Rohde and his team of experts have built up what he calls a ‘unique business model’.

“We have not kept it a secret – we have been very clear that half of it is like liability-driven investment (this is a concept most people understand) and the other is based on absolute return-seeking assets to build up better pensions.”

And longevity, the risk that terrifies most pension scheme investors, how does ATP hedge it?

“We don’t.”

I should have known it was too conventional an idea. Instead, ATP keeps a portfolio of DKK18 billion which it manages to keep up with the increasing longevity of the OECD countries.

“Maybe the ATP model is too complex for the rest of us to understand?” I venture. I speak from experience, having spoken with Rohde at least annually for the past five years on ATP’s structure and visited Hillerød for a private tutorial – I am still less than 100% sure how his ‘risk buckets’ work, but would not mind being a Danish citizen in my old age.

Again, he laughs and says that I will soon be able to benefit from this expertise in the UK.

ATP announced last year that it would be going head-to-head with the UK government-backed National Employment Savings Trust, the pension scheme set up for workers without occupational pension provision.

“With the concept of auto-enrolment, it is an outstanding opportunity for outsiders to get a share of the UK market,” he says.

“We are bringing a proven concept of pension provision that is transparent, forward-looking and is a lifelong product.”

ATP had bid to work with NEST as administrator to the scheme, but pulled out before the winner was decided citing too many uncertainties over the timing of implementation and the size of the scheme.

Now, as auto-enrolment continues to be pushed back by the government, does that make the UK market less attractive?

“Not knowing what the timeframe is does add some risk going forward, but we are sure we will stay and go for it. Britain needs auto-enrolment – companies can no longer afford defined benefit schemes and people need to build up pensions.”

So what’s next for Rohde and ATP?

“All the time we are trying to enhance our understanding of investment models, adding new asset classes and improving our risk management – our core business model is based on risk.”

So more of the same for Denmark’s largest hedge fund – I wonder if the UK is ready for it.