Thursday, February 02, 2012 7:45:06 AM
Was 2011's Most Successful Hedge Fund Actually a Pension?
The Profile: Lars Rohde, CEO of ATP, on the Danish fund's breakout year.
(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.
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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.