A $200 Billion Danish Investor Sorts Bad Hedge Funds From Good

  • Danske wealth management unit says hedge funds stopped hedging
  • CIO still uses hedge funds in Denmark to help with repo trades

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The hedge fund business isn’t what it used to be. For starters, a lot of funds in the industry forgot to hedge at crucial moments over the past decade, according to the men now running the $200 billion wealth management unit of Denmark’s biggest lender, Danske Bank A/S.

“If you look back over time, there are a lot of hedge funds that were really exposed to the market,” Anders Svennesen, the chief investment officer of Danske’s pension arm, Danica, who was recently made CIO at the bank’s wealth unit, said in an interview at his office outside Copenhagen.

“A real hedge fund ought to be market neutral, but an awful lot of them have been riding the wave of falling rates and rising stock prices,” Svennesen said. He doesn’t see outsourcing to hedge funds as a model that suits his goals here and now.

“Historically, we have been exposed to hedge funds in our portfolios,” Svennesen said. “We might get exposure again in the future if it makes sense for our portfolios.”

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Danske says part of its focus on wealth management stems from a desire to diversify its income streams to cope with Denmark’s negative interest rates. The central bank, which defends the krone’s peg to the euro, first cut its main rate below zero in 2012.

Forgetting to Hedge

Svennesen says the trick is to identify hedge funds that actually live up to their mandate of being market neutral, so that they don’t start bleeding money when a sudden shock upends a price trend. He rejects speculation that today’s low-rate environment has undermined the logic of hedge funds, which traditionally charge high fees for their services.

“Those that really manage to be market neutral, and go in and operate in the right way, deliver a positive return, and there’s absolutely still a need for that,” he said. “Especially in the current environment.”

Svennesen says the industry has suffered a blow to its reputation mostly because so many funds let themselves get carried away in market booms, only to be dragged down by the subsequent bust.

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“It’s a perception that’s been fueled by a lot of funds being up to 40-50 percent exposed to market risks,” he said, declining to identify any funds by name.

Poul Kobberup, who manages fixed-income investments at Danske’s wealth unit, says he prefers managing his assets inhouse.

“But there are areas where it’s hard,” he said during the same interview. “A good example is all the easing that’s coming from the ECB, and the liquidity effect of that. The hedge funds we have in Denmark operate in the Danish and Swedish repo markets. They’ve done a fantastic job -- they pretty much all produced a doubled-digit return last year. So done properly, it’s a model that works.”

Jesper Langmack, who oversees alternative investments at the Danske wealth management unit, says 2008 was a turning point that really exposed the hedge funds with poor models. Back then, “we saw that basically none of the big ones were market neutral,” he said. “Even though the whole point of being a hedge fund is being market neutral, they had no diversification, whatsoever!”

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