In late 2024, Laura Wickström concluded her first annual planning cycle as Chief Investment Officer at Veritas Pension Insurance Company, which shaped the investment strategy for 2025. A key topic during this process was the “need for diversification,” particularly as government bonds have recently struggled to fulfill their traditional role as diversifiers. “This is where alternative strategies come into play,” says Wickström, noting that Veritas has hired a new portfolio manager to support its growing emphasis on alternative, quantitative investment strategies.

“I’ve been at Veritas for over six years now – six and a half, to be exact – so I’m familiar with the organization and have closely observed the CIO role,” says Laura Wickström, reflecting on her trasition into the CIO role. “Even though I’ve been here for some time, there’s always room for improvement and development, especially as the market environment keeps evolving.” One of Wickström’s first major projects was revising the investment plan during the annual planning cycle, which the team typically finalizes at the end of each year.

This planning cycle, which demands a forward-looking approach, led Wickström and her team to conclude that diversification remains essential. “Last year, we saw a dominance of U.S. assets — and perhaps precisely because of that, a relatively concentrated segment of the market performed exceptionally well,” says Wickström. “While it’s important to participate in that success, you must also recognize the need to maintain diversification and not overlook its critical role in a portfolio.”

“While it’s important to participate in that success, you must also recognize the need to maintain diversification and not overlook its critical role in a portfolio.”Laura Wickström, CIO at Veritas Pension Insurance Company.

Diversification has become increasingly important, particularly as bonds have been providing less of a diversification benefit than in the past. “In this environment, it’s crucial to look beyond just the government bond segment for diversification and adopt a more holistic approach to portfolio management,” explains Wickström. “We’ve focused on refining our thinking around diversification, a topic that dominated our discussions when developing the investment plan for this year.”

Three Pillars: Carry, Diversification, and Hedging

A key part of the legacy left by former CIO Kari Vatanen is the structured approach to Veritas’ investment portfolio, which is divided into three functional buckets: carry-seeking, diversifying, and hedging. The alternatives portfolio, comprising hedge funds and other hedge fund-like specialist strategies, is similarly categorized based on each strategy’s function. With dispersion rising across asset classes, industries, sectors, countries, and other dimensions, the team led by current CIO Laura Wickström is focused on enhancing the portfolio’s diversification benefits by refining the hedge fund allocation, with a stronger emphasis on quantitative investment strategies.

“The dispersion across markets does present interesting opportunities. This is one reason why alternative strategies, in our view, now offer better prospects than during periods when volatility was low and somewhat suppressed.”Laura Wickström, CIO at Veritas Pension Insurance Company.

“There’s quite a lot of dispersion in the market right now, and I believe we’re in a different market paradigm compared to the pre-COVID era and the 2010s,” says Wickström. However, despite the presence of dispersion, she acknowledges that it’s not always clear how to capitalize on it, highlighting the ongoing need for diversification. “That said, the dispersion across markets does present interesting opportunities. This is one reason why alternative strategies, in our view, now offer better prospects than during periods when volatility was low and somewhat suppressed,” argues the CIO of Veritas.

Quantitative Strategies Take Center Stage

Hedge fund investments, which accounted for 10.5 percent of Veritas’ €4.7 billion portfolio as of mid-2024, generally serve a diversifying role within the portfolio. “We tend to favor systematic quantitative strategies over discretionary ones when it comes to hedge fund investments,” notes Wickström. She highlights the importance of maintaining a diversified allocation, saying that “the diversifying bucket is particularly interesting because you can’t always predict interest rates or the behavior of government bonds.” The team at Veritas “aren’t focused on trying to time or actively manage those factors but rather ensuring adequate diversification across the portfolio.” Wickström emphasizes that hedge funds play a critical role alongside the fixed-income and government bond components in various market scenarios.

“The key idea is to maintain diversification in various forms so that if one component underperforms, we can rely on other sources.”Laura Wickström, CIO at Veritas Pension Insurance Company.

The diversifying component stemming from hedge fund strategies is positioned closer to the government bond allocation, explains Wickström, “but it obviously features different risk drivers, ideally independent of market beta.” The hedge fund allocation specifically represents the diversifying bucket’s idiosyncratic return sources. “The key idea is to maintain diversification in various forms so that if one component underperforms, we can rely on other sources,” she adds.

The higher interest rate environment, which has favored certain hedge fund strategies, makes them more attractive relative to other approaches than in the zero-rate era. “These factors also make hedge funds more appealing on an absolute return basis when compared to other asset classes,” concludes Wickström.