Alternative Investments Within the Danish Pension Funds

Abstract

This thesis investigates alternative investments within the Danish pension funds. The motivation for the thesis is partly rooted within the large focus on this particular asset group from the Danish Financial Supervisory Authority and partly found within the complex and opaque environment surrounding alternative investments. The purpose of the thesis is to deduce whether the allocation to alternative investments of the total portfolio within the Danish pension funds is too large and whether they have the necessary expertise to handle these assets. The conclusion is based on a mixed methods-approach by combining nominal allocation and return data found in the annual reports from the Danish pension funds, within the period 2005-2019, with a survey and several interviews with participants in – or around the Danish pension sector. The analysis finds, that within this 15-year period alternative investments has increased by 418% and accounts for 20,1% of the total investment assets within the Danish pension funds today. Furthermore, the thesis finds that alternative investments on average has given 8,23% in return on a yearly basis. Deduced from the same data a minimum-variance - and a tangent portfolio would suggest an allocation to alternative investments of 19,1% and 26,5% of the total portfolio. The thesis finds that some Danish pension funds generally overperform - and some generally underperform the Danish pension sector throughout the period. It further finds, that performance within properties between the over- and the underperformers is quite equal unlike within unlisted shares where the overperformers tent to experience both larger returns and volatility. The thesis concludes, that the allocation to alternative investments of the total portfolio within the Danish pension funds isn’t too high in general. That being said, the thesis finds a curtain difference of expertise within the Danish pension funds. The growing allocation to alternative investments of the total portfolio is expected to increase further in the coming years and the conclusion is that not all Danish pension funds have the expertise to derive the expected benefits of this asset group based on their present level of competence and experience.