Stockholm (HedgeNordic) – The NHX Equities Index is the largest among the NHX sub-categories, containing 58 funds, which made an average of 3.8% in 2017. Some funds have net equity exposure near zero while others run a net long position above 100%. As the equity-focused award does not distinguish between market neutral managers and those running a net long position in equities, it is highly likely that the latter group will pick up the awards, during a bull market.
Winner of the category, that was presented by Harvest Advokatbyrå, was Rhenman Healthcare Equity Long/Short, with a return of 34.5% in 2017. Return drivers were mainly from the US-listed biotech sector, with nearly half of the return from five stocks. Two produce treatments for high cholesterol: “Nektar Therapeutics (a hitherto neglected firm which I have followed for 20 years) has developed a new drug for high blood cholesterol, and its share price has quadrupled since October 2017” says founder and CIO, Henrik Rhenman. “Esperion Therapeutics has targeted patients who do not respond to the highest doses of traditional treatments, with a new treatment that can be used in conjunction with statins, or for those who are intolerant of statins- and which is cheaper than injectable drugs” says Portfolio Manager, Susannah Urdmark (who is among the few women managing money in the Nordic hedge fund industry). “Adamas Pharmaceuticals has made it to the market with its first treatment for Parkinsons disease; Oncology specialist Exelixis has gained approvals broadening the potential use of its drug, and raising earnings forecasts” says Rhenman; and “Sage Therapeutics, which is focused on Central Nervous System (CNS) disorders, has developed new treatments for identifying early stage depression” says Urdmark.
Pharma, services and medtech sectors also made some contributions to 2017 returns; and Rhenman avoided longs in the generic pharma sector. Shorts lost money, but helped to finance net long exposure in excess of 100%; Rhenman is in the process of developing a new hedging strategy on the short side.
Rhenman finds “the Nordic Hedge Award is a great thing to receive and be nominated for. We are very proud to have it. It is the most prestigious award in the Nordic region, and there is no comparison”.
In second place was Accendo Capital, with a return of 24% in 2017, which came from long holdings in Nordic small cap stocks. Accendo takes an activist approach that usually involves taking a board seat. The largest contributor to 2017 performance was unrealised profits on fibre optic cables maker Hexatronic, which saw its share price roughly double in 2017 (and paid a small dividend). Accendo also exited a position in medical technology group Xvivo Perfusion in 2017. Finnish high-end video game maker Remedy Entertainment also appreciated since the May 2017 IPO in which Accendo participated. Meanwhile, Accendo’s long-term holding in telecom solutions provider Doro declined during 2017. Impact Coatings also saw its share price drift lower, but Accendo, which participated in a December 2017 equity issuance including options, has reported a positive contribution from this investment.
In third place was Borea, which made 19.25% in 2017, running average net exposure to equities of 70%. The top contributors for the year were all nordic: Storebrand, Novo Nordisk and Protector Forsikring.
Borea also benefited from two FANG constituents – Facebook and Alphabet – and have added to these on recent dips. “Facebook is implementing the GDPR framework in Europe and the US. Opt-outs have so far been insignificant and egagement is stronger than ever across all its platforms, despite the headline negatives. Trading on 14 times EBIT for next year and growing EPS north of 20% is within reach caused by an accelerated shift of ad money still going into digital, high flow-through margins and plenty of upside options on a 4 billion user base with Messenger, Instagram and WhatsApp still not fully monetized” explains Borea PM, Kjetil Nyland. Similarly, “We think Google still has a lot of growth left, just from the core of Google search and Youtube in particular. At the current price you basically don`t pay up for the “other bets” part of the business” Nyland adds.
He argues that “It all comes back to risk/reward and what type of future cash flow stream you`re comfortable with owning. Both Facebook and Google have massive sell-side coverage but sometimes, as a industry observer recently and correctly pointed out: bargains like these are hiding in plain sight, partly made possible by the Genovese bystander effect, where everyone witnessed the crime but no one called the police because they all thought someone else would”.
“People dislike uncertainty and markets tend to overdiscount the uncertainty related to identified risks and underdiscount non-explicit risk factors. We tend to get interested in situations characterized by more perceived risks than actual underlying business risk. This has been the common thread for most of our investments” says Nyland.
Most of the returns came from longs, but one short position did generate good profits: Fred Olsen Energy was the fourth biggest contributor. “The shareholders will probably get diluted at some point. The credit was trading as low as 30 cents on the dollar, and if you get a 50% yield on the debt, it does not make sense to buy the equity” says Nyland. Borea also runs credit strategies that can provide useful signals for the equity strategies. Occasionally, Borea will own both debt and equity in the same company.
Nyland thinks “the Nordic Hedge Award is a very good initiative. There are not that many alternatives with a similar format. We always appreciate having the opportunity to meet like-minded investors from the industry”.
Left to right: Henri Österlund (Accendo Capital), Willy Helleland and Kjetil Nyland (both Borea Asset Management), Gustav Sälgström (Harvest Advokatbyrå)
