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Hedge funds get key role at US$140b Swedbank money manager

Stockholm

AT Swedbank Robur, which manages about US$140 billion in assets, hedge funds are playing a bigger role in helping the firm tackle whiplash-prone markets.

The Swedish asset manager, a unit of Swedbank AB, took a more cautious approach to equities through 2018, and says it's relying more on alternative strategies to help generate returns.

"We manage multi-asset funds and, if you compare the start of 2018 with the end, we've decreased the risk in the funds by cutting equities somewhat," said Pia Haak, head of asset allocation at Swedbank Robur in Stockholm.

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"Having said that, after the December downturn, we're neutral to slightly overweight against our benchmarks in our blended mandates funds," she added.

"We've also found opportunities in alternative assets, particularly market neutral hedge funds," she said in an interview.

"Our interest to find interesting opportunities within the alternative space has increased during the last year," Ms Haak said.

Market-neutral hedge funds, which try to design their strategies so that they're profitable regardless of whether markets rise or fall, make up the majority of the roughly 20 per cent that Swedbank now allocates to hedge funds in its multi-asset strategy, according to Ms Haak.

The risk for equity investors, as she sees it, is that a lot is resting on companies delivering on expectations. If they fall short, the generally positive start to the year could quickly turn sour.

"If this slightly more positive attitude on the stock markets is to last at least a couple of months, then I think we need a good upcoming earnings season," Ms Haak said.

But there's plenty that could go wrong, with a lot of the potential headwinds stemming from political risk. Britain's chaotic process of leaving the European Union and the continued uncertainty surrounding global trade disputes are key threats that could upend investment strategies.

"Brexit is very difficult," Ms Haak said. "It feels like they keep having to start all over. However, I do think we'll see a solution that is something other than a hard Brexit, so I feel that something positive might emerge."

"The trade war is even more difficult," she said. US President Donald Trump is "hard to predict". But even here, Ms Haak says there's "a possibility" that markets might not suffer too much because "a lot of the negativity has already been priced in. So there is an upside here".

There are also other risks. Part of the concern is that there are too many investors who don't really understand the markets they're in, and their presence poses a threat in itself, according to Erik Brandstrom, the chief executive officer of US$5.5 billion Spiltan Fonder AB. He says this category of investor hasn't kept up with the new dynamics that are now steering prices.

"There used to be risky assets as well as assets with no risk," he said in an interview. "That just doesn't work anymore, as everything interacts and becomes more or less risky. There's nowhere to hide."

"Investors buy stuff they don't really understand; they think they'll get returns; we get a downturn; people panic and sell," Mr Brandstrom said. That dynamic "strengthens the downturn", he said.

"It's a systemic risk," he said. "People have bought too many risky assets without understanding risk and risk tolerance." At Spiltan, fund managers are responding to the new world order by adhering to the mantra of stock picking.

"Volatile markets provide us with the opportunity to be active investors and to find and buy companies that otherwise just disappear in the darkness because nobody has the energy to care," he said.

Spiltan Fonder is also avoiding corporate giants and turning to smaller targets to generate extra returns.

"If you want a return versus the index, it doesn't make sense to buy the biggest companies," according to Mr Brandstrom. "It's better to look to the middle segment, which has the most interesting companies. Bigger companies tend to be a bit tired, over-analysed and over-invested." BLOOMBERG