A public health care and pension fund in Sweden, managed by Fredrik Holst, was in trouble even before the first rumblings of a global credit crisis. Now, after a year in which the fund has seen one of its managers implode and its own liabilities soar because of a weak economy, Holst is pulling out of hedge funds to try to contain the damage.
Landstinget Västmanland, a $200 million vehicle that handles public health care costs for Västmanland County’s 260,000 residents as well as the pensions of 6,000 public employees and retirees, faced a $450 million deficit going into 2007. Despite trying to shrink that number — investments in hedge funds were a major part of that effort — a long year of market tumult has left the plan in a precarious position that seems to have killed its appetite for alternatives.
“We have to consider the short-term economic results of everything we do,” says Holst, the head of finance for Landstinget Västmanland. “We’ve been very cautious. One day, hopefully, the market will straighten out, but until then we’ll monitor our manager decisions very carefully.”
Landstinget Västmanland made its first hedge fund investment more than three years ago. In early 2005 the plan allocated about 10 percent of its assets to a fund-of-funds portfolio that was being managed by British Virgin Islands–based Victory Capital Management. For two years the investment performed more or less as expected, returning approximately 5 percent annually after fees.
One of the five hedge funds in Victory’s portfolio was managed by West Side Advisors, a small New York–based firm that specialized in mortgage-backed-securities investment strategies. The firm, which had been founded in 1994 with the intention of delivering consistent double-digit annual returns, ran into major problems early in 2007 when the subprime mortgage market began to sputter and announced it was closing that August.
For the year, Landstinget Västmanland’s hedge fund portfolio was down 20 percent, limiting its overall return to 1 percent. (The fund had allocated 20 percent to Swedish equities, which were in the red as well, 55 percent to Swedish fixed-income funds and 15 percent to international equities.)
Hoping to stave off further setbacks, Holst and Landstinget Västmanland’s five-member finance department decided in August 2007 to redeem the plan’s remaining $14 million hedge fund investment. (They completed the process this September.)
The money will be moved into what they view as a less risky option: international stocks, which will account for as much as 55 percent of the portfolio. The equity allocation’s international focus is owing to the volatility of Sweden’s domestic stocks. The remainder of the foundation’s money will be in Swedish fixed-income investments.
Making Landstinget Västmanland’s situation even bleaker is the likelihood that pension costs will increase by 50 percent over the next five to ten years because of Sweden’s aging population. Holst figures the fund can meet its obligations if it can produce annual returns of 6 percent over the period, but that is a daunting goal because 2008 looks to be the first year in which the fund will lose money (as of August 31 the portfolio was already down 6.1 percent, before recent market turmoil).
The national economy isn’t helping much — the Swedish stock market was down almost 50 percent this year as of October 28. “If the turmoil continues, we might not be able to do what we need to do,” Holst says. “Unfortunately, if we don’t have the money, we’d cut down on health care.”
Holst’s predicament mirrors a bigger national problem in Sweden. Counties throughout the country are weighing whether to curtail health care spending or make pension cutbacks. Landstinget Västmanland, in fact, is comparatively strong — it is among the five most financially stable of Sweden’s 21 county funds.
Holst, who is only 34, has been at the helm of the fund for almost eight years. Before he got his current job, he worked as a private-banking adviser at Stockholm-based Nordea, the largest financial services group in the Nordic countries, where he developed a fondness for hedge funds. Holst says he still has a soft spot for them and that Landstinget Västmanland’s breakup with hedge funds may eventually turn out to be more of a trial separation than a divorce.
“We haven’t totally closed the door to hedge funds,” he says. “If we find some that are transparent and low-risk, we may well invest later on. But right now our priority is to find new managers in what we want — stocks and fixed income.”
