Successful year for hedge funds
Other investments accounted for 16 (16) per cent of Varma’s portfolio. They consist of hedge funds (13 per cent), inflation-linked investments (3 per cent) and a relatively small commodities position. The return on other investments was 4.5 (6.0) per cent.
The return on hedge fund investments was 8.8 (6.8) per cent. They performed consistently with only minor fluctuations. Hedge-fund investments are almost entirely US-dollar denominated. Changes in euro exchange rates somewhat diminished the return; the return on hedge funds, excluding the impact of currency exchange rates, was 11.2 per cent. The five-year return has been steady and at a very good level at 12.1 per cent, which has contributed significantly to Varma’s total returns.
Inflation-linked investments include inflation-linked bonds issued by states with good creditworthiness. Their return, -8.2 (6.5) per cent, was affected by the rise in real interest rates and by the slow-down in the inflation rate. Bonds typically have a long maturity, as result of which the increase in real interest rates and slowing of inflation weakened their capital values.