Fixed-income Hedge Funds in Pension Savings: Is It Risky or Rational

Rasmus Kjellberg

Student thesis: Master thesis


This thesis investigates the characteristics of Danish fixed-income hedge funds, and seek to analyze if these are suitable for a pension saving portfolio. Hedge funds are viewed as highly risky investments and therefore not considered a suitable asset class in a pension saving. The validity of this view will be investigated and there will be constructed a range of pension portfolios including fixed-income hedge funds, in order to examplify how this could look. The first part of this thesis describes the constuction of a model-portfolio, which has the purpose of acting as the objective of optimization. There will be constructed a hedge fund index of Danish fixed-income hedge funds, in order to create a Danish hedge fund return sample, for the use in the further analysis. The first analysis analyzes the historical drawdowns of the hedge fund index and the constituents of the traditional model-portfolio. The analysis extents to a range of tail risk estimations, and analyzes the results of the hedge fund index compared to the traditional assets. The analysis shows that the hedge fund index would have been a significantly better investment through the financial crisis of 2008-2009 than most of the traditional assets, such as equities, realestate, and infrastructure. This is supported by the estimations, which consistently show that the tail risks of fixed-income hedge funds are significantly lower than of the traditional assets in the modelportfolio. The second analysis is focusing on the optimization of the model-portfolio including the hedge fund index in order to provide an optimal pension portfolio. The analysis is built on Markowitz’ Modern Portfolio Theory and constructs a range of optimal portfolios under different conditions, both regarding the traditional assets and the hedge fund index. It is nessecary to restrict the maximum weight of the hedge fund index, in order to avoid corner solutions, due to the significant risk/return characteristics of the hedge fund index compared to the traditional assets. The conclusion of this thesis is that fixed-income hedge funds should be a natural part of a pension saving portfolio equated with private equity and other alternative investments. The, historical and estimated, tail risks of the Danish hedge funds show that these funds are significantly more stable than assumed compared to other asset classes.

EducationsMSc in Finance and Investments, (Graduate Programme) Final Thesis
Publication date2018
Number of pages81