The Nobel Foundation, which this year lopped 20 percent off its cash prizes, is planning to invest more money through hedge funds to boost its returns and restore the award to its previous size.
“When we look at the analysis we see that we can get more return with less risks by doing that,” Executive Director Lars Heikensten said in an interview at the Nobel Foundation’s Stockholm headquarters yesterday. “If we can choose hedge funds that we trust, then we can get better returns for given risks.” The fund “probably shouldn’t” be fully invested in debt securities, he said.
The Nobel foundation, created in 1900 at the request of Swedish industrialist Alfred Nobel to award prizes in physics, chemistry, medicine, peace and literature, this year cut the cash amount of its prize for the first time since 1949. The move followed a decade of poor returns, exacerbated by the onset of the global financial crisis.
The foundation had 2.97 billion kronor ($448 million) in investments at the end of 2011, corresponding to an 18 percent slump from its 2007 level, according to its website. The decline prompted a cut in this year’s prize amount to 8 million kronor, from 10 million kronor to safeguard Nobel’s capital.
“It was a difficult decision to take, since Nobel when he wrote his will made clear he wanted his money to be used for prizes,” said Heikensten, a former governor of the Swedish central bank.
An economics prize was created by Sweden’s Riksbank in 1968. Alvin E. Roth and Lloyd S. Shapley shared the award this year for their work on matching supply and demand. Previous laureates include Milton Friedman and Paul Krugman. The 2012 peace prize went to the European Union.
“We live in difficult times and had not been as successful as one would have wanted in the last 10 years,” Heikensten said. The foundation “had in fact been spending more every year on average than” it had been earning, “and we had to do something,” he said.
The fund has returned 1.5 percent to 2 percent, on average, over the past 10 years, below the 3.5 percent to 4 percent needed to keep its capital stable, according to Heikensten.
Average hedge fund returns don’t suggest the Nobel Foundation will be much better off. The HFRX Global Hedge Fund Index, a measure of hedge fund performance, has gained 2.4 percent in the first 11 months of this year. The MSCI world index of global stocks returned 11 percent in the same period, though it fell 26 percent between the end of 2007 and the end of 2011.
In 2011, 47 percent of the Nobel foundation’s invested capital was in equities, down from 67 percent in 2007, according to its website. Over the same period, stakes in alternative investments rose to 33 percent from 12 percent, driven by an increase in allocations to hedge-funds and private equity funds to 24 percent, from 6 percent in 2007. Fixed-income investments were at 20 percent, versus 21 percent in 2007.
While the average return on the foundation’s total investments stood at 0.6 percent in those five years, the equities portfolio had a loss of 2.4 percent.
Alfred Nobel signed his will in 1895, a year before his death, stipulating that most of his estate of more than 31 million kronor -- about 1.7 billion in today’s money -- should be converted into a fund and invested in “safe securities.”
Following two world wars, the foundation changed its investment policy with the backing of the Swedish government in the 1950s, after the total amount managed fell. Since then, it has been allowed to invest in bonds, secured loans, real estate and most types of stocks. This, together with a tax-exemption in 1946, helped the Nobel Foundation reverse the trend of declining assets under management and the real value of the prize amount in kronor terms was restored by 1991.
The Nobel Foundation is also trying to cut costs and has approached suppliers of its lavish award banquet -- held each year on Dec. 10 in Stockholm City Hall, after the prizes are announced -- in an effort to negotiate price cuts as steep as 20 percent. The roughly 1,300 guests include the Swedish royal family.
The state of the foundation’s finances is “definitely not a crisis,” he said. “We could have gone on like that for 30 years, but it’s better to start doing something in good time.”
The Nobel Foundation wants to cut annual costs by about 20 percent to match the reduction in the prize money, Heikensten said.
The foundation has also brought in external advisers and will cut the number of investment alternatives to as low as 20, from 40 previously. That will make investing more manageable, Heikensten said. All the measures together will help bring returns to 3 percent, he said.
“It will depend on the world economy, and the situation is difficult, but I think it should be achievable,” Heikensten said. “We definitely don’t want the prize to go down, and I think we should have the ambition to keep its value in real terms in Swedish kronor, which has been the case since 1901 -- that’s the minimum ambition one should have,” he said.
The 10 million kronor paid to laureates last year is equivalent to 123 percent of the inflation-adjusted amount first awarded in 1901. This year’s prize, in real terms, was less than the original award for the first time since 1990, according to information available on the Nobel Foundation’s website.