Sweden's Nobel Turns to Hedging to Preserve Prize Fund From Currency Risk

Sweden’s 100-year-old Nobel Foundation, which every October gives 60 million kronor ($9 million) to prize winners in the award’s six categories, has begun hedging against the risk of currency fluctuations.

Last year, the 3 billion-krona ($448 million) foundation switched to a policy that calls for offsetting risk in all its foreign bonds and half its hedge fund investments to help protect the Nobel’s future.

“There is this need to hedge, otherwise the returns can be absolutely drowned in the currency volatility,” Michael Sohlman, the Nobel Foundation’s executive director, said in an interview in Stockholm. “Our view is long term. The important thing is to be around for another 100 or 1,000 years.”

Exchange-rate controversies are spooking markets. Treasury Secretary Timothy F. Geithner and European Central Bank President Jean-Claude Trichet have called on China to let the yuan rise, while China and some emerging nations have complained about low U.S. interest rates. Brazilian Finance Minister Guido Mantega said last week a currency war is underway.

“We’ve gotten advice to hedge before and it was very good that we didn’t in 2008,” Sohlman said. “We had a positive effect from the dollar surge in 2008 and once you get that kind of windfall profit you have to ponder whether it will go on or not.”

Photographer: Simon Dawson/Bloomberg

Christopher Pissarides, an economics professor at the London School of Economics. Close

Christopher Pissarides, an economics professor at the London School of Economics.

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Photographer: Simon Dawson/Bloomberg

Christopher Pissarides, an economics professor at the London School of Economics.

Generating Gains

Until 2009, the foundation took the view that currency fluctuations offset each other over time. Last year though, the group decided to hedge part of its currency positions in foreign holdings, generating a gain of 50.9 million kronor last autumn.

While the market value of the assets at the end of 2009 is still 14 percent below the 3.63 billion kronor in 2007, the fund had a total return of 14.4 percent last year and a gain of 4.6 percent from between 2005 and 2009 on its equities investments.

The U.S. was the biggest recipient of the investments last year, with 24 percent of the total, followed by the rest of Europe with 13 percent. About a fifth was invested in hedge funds and private equity, up from 15 percent at the end of 2008.

The investments are managed by the foundation’s board of directors, which comprises seven members and two deputies.

Sohlman said the Foundation’s goal is to “safeguard the financial base” and find a return of “around 6 percent,” enough to “maintain the value with a certain amount of growth” and pay for expenses.

The Stockholm-based Nobel Foundation was created in 1900 at the request of Alfred Nobel, the Swede who invented dynamite and established awards for achievements in physics, chemistry, medicine, peace and literature in his will in 1896.

Liu Xiaobo, a jailed Chinese dissident, was awarded the 10 million-krona ($1.44 million) Nobel Peace Prize on Oct. 8 for his efforts to promote democracy and human rights, while Mario Vargas Llosa, the Peruvian writer whose work explores the political corruption and military dictatorships of Latin America, won this year’s Nobel Prize in Literature.

The economics prize was set by Sweden’s central bank in 1968. Peter Diamond, Dale Mortensen and Christopher Pissarides shared the 2010 Nobel Prize in Economic Sciences for their work on the efficiency of recruitment and wage formation as well as labor-market regulation.

To contact the reporters on this story: Adam Ewing in Stockholm at aewing5@bloomberg.net; Marybeth Sandell at msandell1@bloomberg.net

To contact the editor responsible for this story: David Merritt at dmerritt1@bloomberg.net.

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