Positive return from hedge funds and defensive macro positioning

By Hamlin Lovell, NordicInvestor 

A return of 1.0% in 2022 was no mean feat. It came partly from multi-year asset allocation decisions, and partly from well timed trades in equity put options and the US dollar, which are in fact relatively unusual since the EUR 1.2 billion fund does not normally do much in terms of tactical asset allocation.

Some investors, who perhaps fall prey to the “house money” bias in behavioral finance, take more risk after a winning period. Apoteket takes the opposite view. “Our annual asset/liability study reduces the target return if the fund is in a great solvency surplus (192% per end of 2022), as is the case now after a strong five year period averaging returns around 6%. The return target is usually around 3%, but was reduced to 2.5% at the start of 2022, after all costs,” says CIO Gustav Karner, who runs the fund with a quantitative specialist, outsources operations, and makes some use of external consultants.

Core holdings in hedge funds

For some investors, hedge funds are a satellite allocation alongside their core exposure to long only conventional assets. For Apoteket, hedge funds have become the core, and at over 30% of the fund, are almost three times larger than the long only equities allocation

The hedge fund allocation was actually raised as a bond substitute. When Karner arrived at Apoteketin 2017, from the Nobel pension fund, yields were very low and investment grade credit was “return free risk”. He therefore replaced a substantial amount of the fixed income exposure with a portfolio of hedge funds. Karner had built up strong relationships with hedge fund managers over around 20 years, at The Nobel Foundation and Länsförsäkringar, which even seeded a US-based hedge fund manager founded by a Norwegian. Karner is relatively unusual in the Nordics in using some investment consultants (in the UK and Switzerland) to help secure access and capacity in some sought after hedge funds.

The largest allocation is to leading multi-strategy hedge funds headquartered in London, New York and Chicago, which have hundreds of teams or “pods” trading equity market neutral and event driven strategies as well as some credit and macro strategies. (Apoteket does not have any direct exposure to pure discretionary macro funds).

The multi-strategy firms, which are famous for their risk management policies, outperformed Apoteket’s pure long/short equity managers, including a London-based activist, which did incur some losses in 2022 as they maintained net long exposure to equity markets.

Quantitative managers delivered mixed performance. One trend following CTA based on the West Coast of the US did very well while another, which is one of the oldest CTAs, using different sorts of models, performed less well but still positive for the year. There is also a more multi-strategy quantitative fund. One of the CTAs is invested in through a UCITS fund, which has lower fees and better liquidity.

Distressed debt is run by a manager that also trades merger arbitrage and has some small sleeves in long/short equity, commodities and fixed income.

There are also two Swedish hedge funds in the book: one in long/short equity and another one financing life insurance policies.

Bonds and credit

The bond book saw some modest losses, which were reduced by running less interest rate risk for most of the year. Two short duration fixed income funds lost considerably less than longer duration bonds.

Karner acknowledges that he extended duration a bit too early in spring and during the summer of 2022, since interest rates increased by much more than he (or market consensus forward rates) expected. “However, the overall portfolio duration now at around 4.8 years for investment grade and 2 years for non-investment grade is still a little below the benchmarks. Duration is also reduced through owning a global fund of floating rate loans which has minimal duration,” says Karner.

Equities, put options and the US dollar

“The overall equity allocation in 2022 was slightly positive at +0.6%, versus a reference index down 10.9% in SEK. The put options generated a profit of about SEK 150 million, after premiums, effectively covering losses on the long only equities,” says Karner.

In mid-January 2022, exposure of 15% was reduced to 8% by put options, which were sold at the end of September 2022, close to the trough of the market. Year end equity exposure was 11.3%.

Karner initiated the recent put option strategy in autumn 2021, and rolled it several times. “Exchange traded puts on the S&P 500 and OMX indices were used, and 1×1 spreads were employed to reduce the cost. SEB provided some advice, but I have been trading put option strategies since 20-30 years ago from time to time. Of course, the puts do not always profit and did not for me in 2016,” says Karner.

Long only equities are accessed mainly through ESG index funds run by Handelsbanken, which Nordic Investor has interviewed. The indices exclude coal, tobacco, and controversial weapons. The benchmark of 25% Swedish and 75% world equities contains only small exposure to emerging markets, and the fund is slightly underweight of them.

Another defensive move for the first nine months of 2022 was doubling US dollar exposure from about 8% to 16%. This was closed out at around the same time as the equity put options.


“Private equity in 2022 was slightly positive, up 2.8%, thanks to leaving the US dollar exposure unhedged for most of the year. But even ignoring currency effects, the PE strategies have performed well, losing only about 3-4%,” says Karner.

This is partly because they are relatively late cycle funds. There are two US funds (of which one is run by one of Apoteket’s hedge fund managers) and a product run by a Swedish manager combining funds and co-investments.

A real estate allocation of 15% is mainly in Sweden, and did see some negative performance, down around 4%, but that is clearly less than listed property equities in Sweden. “There is a residential property strategy renting houses in smaller cities in Sweden, another one that manages schools, old people’s homes and prisons, meaning that the tenants are municipal governments,” says Karner.

Impact investments

Other real assets include impact investments in renewables such as solar panels and storage run by a UK based manager. Apoteket does not require these strategies to report under SFDR 9, but Karner expects that many of them are likely to do so. Apoteket does a similar ESG or renewable investment annually.


Real assets could be increased. “The allocation was raised from 10% to 15% a year ago to protect against inflation, and could even be further increased”.

He is not currently bullish enough to raise equity exposure, because it may take time to get inflation down – especially if central banks are serious about the 2% target – which means rates could stay higher for longer. Moreover, higher interest rates mean that fixed income is now an alternative to equities, but Karner is still staying relatively short duration.

Currently Karner is not bearish enough to revisit the equity puts because equity valuations are lower. “However, equities would need to get cheaper to add to them. We might go back to 20% but not 30%, partly because our high solvency ratio lowers the return target. The equity allocation was as high as 30% in 2017, before coming down to 25% then 20%, then troughing out at 10% over the past year,” says Karner.

Karner does see some risk of a “hard landing”, but he is not really wagering on this scenario, and is not inclined to adjust tactical asset allocation on a multi-month basis in response to recent data. “Sitting in Norrlandsgatan in Stockholm, we do not expect to perform better than the best hedge fund managers in New York,” he says.