The hedge fund business isnâ€™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 Denmarkâ€™s biggest lender, Danske Bank A/S.
â€œIf you look back over time, there are a lot of hedge funds that were really exposed to the market,â€ Anders Svennesen, the chief investment officer of Danskeâ€™s pension arm, Danica, who was recently made CIO at the bankâ€™s wealth unit, said in an interview at his office outside Copenhagen.
â€œA 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,â€ Svennesen said. He doesnâ€™t see outsourcing to hedge funds as a model that suits his goals here and now. â€œHistorically, we have been exposed to hedge funds in our portfolios,â€ Svennesen said. â€œWe might get exposure again in the future if it makes sense for our portfolios.â€
Danske says part of its focus on wealth management stems from a desire to diversify its income streams to cope with Denmarkâ€™s negative interest rates. The central bank, which defends the kroneâ€™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 donâ€™t start bleeding money when a sudden shock upends a price trend. He rejects speculation that todayâ€™s low-rate environment has undermined the logic of hedge funds, which traditionally charge high fees for their services.
â€œThose that really manage to be market neutral, and go in and operate in the right way, deliver a positive return, and thereâ€™s absolutely still a need for that,â€ he said. â€œEspecially in the current environment.â€
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. â€œItâ€™s a perception thatâ€™s been fueled by a lot of funds being up to 40-50 percent exposed to market risks,â€ he said, declining to identify any funds by name.
Poul Kobberup, who manages fixed-income investments at Danskeâ€™s wealth unit, says he prefers managing his assets inhouse.
â€œBut there are areas where itâ€™s hard,â€ he said during the same interview. â€œA good example is all the easing thatâ€™s coming from the ECB, and the liquidity effect of that.â€