Stockholm (HedgeNordic) – The fund management company Nordic Cross Asset Management, a part of the Altor-owned Caram Group, launched two new hedge funds in August this year; Nordic Cross Total Return Bond Fund and Nordic Cross Stable Return. The prior is an alternative investment fund focusing on fixed income markets while the latter can be described as an alternative multi-strategy fund expressing trades through the fixed income sector as well as through equity positions.

The portfolio managers behind the two funds, Ulf Strömsten, Mikael Hanell, Magnus Nilsson, Fredrik Tauson och Emil Nordström, have an extensive background managing similar hedge fund mandates at Catella and Carnegie.

In an interview with HedgeNordic, fixed income manager Magnus Nilsson along with derivatives expert Emil Nordström explained how they currently view the market and how they are building the fixed income part of the Nordic Cross portfolios. Ulf Strömsten, who manages the Stable Return Fund, shared thoughts behind the fund’s positioning within the equity sector.

HedgeNordic: Could you briefly describe how you manage the Nordic Cross Total Return Bond Fund?

Magnus Nilsson: “On the long side, the fund has a broad mandate. We could own a wide range of assets with different risk characteristics ranging from cash, cash deposits and government bonds to certificates, mortgage bonds, investment grade bonds and corporate bonds. We could also buy into high yield bonds but only up to a fixed exposure limit of 40% of the funds assets.”

“Geographically, we will focus on our home market. In excess of 50% of the funds exposure will be linked to Scandinavia over time and the remaining part will be focused on northern Europe. In the words, we will not have any exposure in the US, Asia or in emerging markets.”

“Our target return over an investment cycle is set to 2.5% – 3.5% above the STIBOR reference rate. Since this is an actively managed fund we have the opportunity to work with short positions and hedging, in the case of the bond fund, this will primarily be used to adjust interest rate risk and credit risk given our market view.”

What is your current market view?

Magnus Nilsson: “Given that we have a 5-year government bond rate in Sweden that is more or less zero while inflation numbers and growth merits a normalisation of monetary policy, we consider the situation somewhat alarming. We believe there is room for higher interest rates and act accordingly. On the long side of the portfolio we work with so-called Floating Rate Notes to reduce the sensitivity to interest rate risk and on the derivatives side we use options and futures to protect duration risk.”

Emil Nordström: “When it comes to credit risks we work with Credit Default Swaps against broader indices. While market volatility is very low at the moment while at the same time the cost of buying protection through derivatives are at historical lows, we could very well make use of this situation to pare potential risks in the credit markets.”

How are you currently positioned?

Magnus Nilsson: “We build the portfolio with caution and will hold a large amount of cash initially. There is very little value in assets holding high credit ratings today. For single-A and triple-B names you essentially don´t get paid for taking credit risk. There are however pockets of value in double-B credits when it comes to subordinated loans linked to the bank and insurance sectors where you could get 2-4.5 percent yields on 3 year maturities. This is where we have been most active during the starting phase of the fund. Given the fund´s target return we have no reason chasing returns by investing into companies with low credit ratings.”

“The target group for the fund is investors that are looking for diversification within low risk holdings such as government bonds or cash, holdings that currently have negative yields.”

How do you construct the mult-strategy fund Nordic Cross Stable Return?

Ulf Strömsten: “When it comes to our equity exposure, it consists of three parts; a market neutral part, a long/short equity part and an event driven part. The market neutral portfolio is the dominating one among the three. The way we reason when it comes to market neutrality is that we, from a value perspective (not beta adjusted), should have a portfolio that has the same exposure on both the long and the short side.”

“Among other things we do pair-trades within sectors where we take long positions in companies that we like and short positions in companies that we dislike for some reason. When we are now just starting building our fund, we have been most active on the market neutral side of the portfolio as we think there is a lot of uncertainty with regards to the business cycle and the overall market.”

“The long/short part of the fund is allowed to take directional bets in the market. The net exposure could vary from -30 to +30 percent. The mandate for this part of the portfolio is however smaller compared to the market neutral one.”

“The event-driven part of the portfolio is driven by special situations in the market, which we currently se a lot of. It is primarily three types of events that we look for; placings, IPO:s and traditional refinancing and restructuring cases where a company´s structure or business model is being modified. Initially, most of the investments on the event-driven side has been made through placings.”

According to Strömsten, the goal is for the fund to have an equity exposure of around 60 percent and that the remainder should be linked to fixed income markets the way it is managed in the Total Return Bond Fund.

“It is worth highlighting that this fund has a very tight range when it comes to risk taking. In terms of standard deviation, the risk should be in the range of 2.5-3 percent. It puts a lot of pressure on how the fund allocates between strategies and explains why we have an overweight to the market neutral part of the fund under current conditions. We consider valuations within equities being relatively stretched, at the same time there are a lot of potential risks boiling underneath the surface, political as well as economical. Overall we hold a cautious stance.”

 

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Jonathan Furelid

Jonathan Furelid is editor and hedge fund analyst at HedgeNordic. Having a background allocating institutional portfolios of systematic strategies at CTA-specialist RPM Risk & Portfolio Management, Mr. Furelid’s focus areas include sytematic macro and CTAs. Jonathan can be reached at: jonathan@hedgenordic.com

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