Making Sense Navigating the hedge fund frontier: Insights from the Elo Pension Fund
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Jun 24, 2025 Kari Vatanen, head of Asset Allocation and Alternatives at Elo, one of Finland's largest pension funds, discusses the evolving landscape of investing. He highlights the significance of hedge funds and illiquid assets in portfolio diversification amidst market uncertainties. Vatanen shares insights on Elo's asset allocation strategy, emphasizing a balanced 60-40 portfolio approach. The conversation also touches on the challenges of valuing illiquid assets and the need for transparency and collaboration in asset management, especially during inflationary periods.
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Market Shocks Disrupt Diversification
- Market dynamics have recently decoupled from fundamentals, with external shocks dominating short-term moves.
- This causes traditional asset correlations and diversification benefits to break down during crises.
Historical Bond-Equity Correlation
- Negative correlation between equities and bonds has been an anomaly of the past 40 years tied to declining rates.
- Historically, equities and bonds were mostly positively correlated, questioning traditional 60/40 portfolio assumptions.
Illiquid Assets’ Artificial Diversification
- Private assets show artificial diversification due to smooth valuations and delayed reporting.
- During quick market drawdowns, private asset prices lag public markets, causing temporary negative correlation.