The Nobel Foundation, which said last year it was using hedge funds to help boost capital, is now considering charitable donations after its investment strategies failed to bring in enough money to fund prizes.
The Stockholm-based institution, which earlier this month rounded off its 2013 awards, cut the prize money by 20% last year in an effort to preserve capital. Since then, laureates have had to make do with 8 million Swedish kronor ($1.23 million) in each category. Lars Heikensten, executive director of the Nobel Foundation, says he wants to raise the amount again to restore the award's status.
“There is a long-term problem if we want to raise the ambition level, which I'd like to see us do,” Mr. Heikensten said in an interview at the Nobel headquarters in the Swedish capital. “It'll be difficult to save more and it will also be difficult to maintain costs at the current level. This indicates there will be a need for more money over time.”
The Nobel Foundation, created in 1900 at the request of Swedish industrialist Alfred Nobel to award prizes in physics, chemistry, medicine, peace and literature, is cutting costs after expenses outstripped income for a decade. Poor returns over the same period were then exacerbated by the onset of the global financial crisis. Given the circumstances, the foundation says it had no choice but to lower the prize last year for the first time since 1949.
Relying on hedge funds over standard equity indexes over the past year would have resulted in relative losses. The HFRX Global Hedge Fund index rose 5.4% over the past 12 months, compared with a 17.6% increase in the MSCI World index of stocks over the same period.
The foundation “should of course continue to try to improve our asset management, but I'm not sure that will be enough,” Mr. Heikensten said. He didn't say in which hedge funds the foundation invested.
The foundation's return of 7.9% on invested capital in 2012 was “a little bit better than our benchmarks,” Mr. Heikensten said. Returns this year have so far “been better” than benchmarks, he said.
The foundation tracks its returns against gauges that include pension funds and other money managers as well a so-called normal portfolio, in which equities account for 55% of the total, and alternative investments and fixed-income instruments make up 25% and 20%, respectively.
Actual asset allocation at the end of 2012 was equities, 51% (up from 47% a year earlier); alternatives, 33% (unchanged from 2011); and fixed income, 16% (down from 20% in 2011).
As much as 94% of the foundation's total capital is based on the original contribution made by Alfred Nobel.
While the foundation has “absolutely no plans” to seek donor capital now, it will need to explore the option “in the coming years,” Mr. Heikensten said. Any arrangement would need to safeguard integrity and independence of the Nobel award, he said.
Mr. Heikensten, a former governor of the Swedish central bank, also said the Nobel Foundation should aim to increase the prize amount in line with wage developments rather than inflation. The amount today represents only about 10 times a professor's salary, compared with about 30 times when the prizes were founded, he said.
Alfred Nobel signed his will in 1895, a year before his death, stipulating that most of his estate of more than 31 million kronor — about 1.7 billion kronor in today's money — should be converted into a fund and invested in “safe securities.”
Following two world wars, the foundation changed its investment policy with the backing of the Swedish government in the 1950s, after the total assets declined. Since then, it has been free to invest in bonds, secured loans, real estate and most types of stocks. This, together with a tax exemption in 1946, helped the Nobel Foundation reverse the trend of declining assets and the real value of the prize amount in krona terms was restored by 1991.
