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Hybrids to the Rescue

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Stockholm (HedgeNordic) – “If central bankers abandon their self-proclaimed mandate to manage everything from stock market downturns to corporate bonds sell-offs, the market economy as we learned in school might return,” the founders of Swedish asset manager Carlsson Noren Asset Management told HedgeNordic back in early 2018. “This is a prerequisite for global macro hedge funds to be able to forecast the developments in the market and make money,” emphasized Fredrik Carlsson and Martin Norén. Fast forward three years, the central bank-controlled environment has not changed much.

In an interview with Finwire, Fredrik Carlsson says that the bond market has changed fundamentally sincecentral banks joined the buying side. According to Carlsson, bond rates are manipulated and everyone understands that the world cannot afford higher interest rates. “At the same time as Finansinspektionen and the Riksbank believe that Sweden needs a better corporate bond market, the Riksbank is on the buying side and thus the market is not allowed to function as a market,” Carlsson tells Finwire. “We do not rule out that the Riksbank will actually lower interest rates again.”

“At the same time as Finansinspektionen and the Riksbank believe that Sweden needs a better corporate bond market, the Riksbank is on the buying side and thus the market is not allowed to function as a market.”

This market environment has not been particularly fruitful for Carlsson Noren Asset Management’s macro fixed-income hedge fund, Carlsson Norén Macro Fund. The fund has generated a cumulative return of less than one percent in the past 36 months. The asset manager’s younger fund focused on hybrid securities has fared much better since launching at the beginning of 2019. Carlsson Norén Yield Opportunity, which represents “an actively managed alternative fixed income fund which invests in the space between bonds and equities, or so-called hybrid securities,” has generated a cumulative 15.6 percent since January 2019 after gaining 5.2 percent in the first four months of 2021.

Backed by Swedish real estate investor Erik Selin, the team at Carlsson Norén Asset Management launched the fund to invest in hybrid securities such as preferred stock, corporate hybrid bonds, bank hybrids such as additional tier 1 or tier 2 bonds, and to some extent, convertibles. The fund also invests in collateralized loan obligations (CLOs). Carlsson Norén Yield Opportunity gained 10.8 percent in its first year of operations, edged down 0.8 percent last year, and advanced 5.2 percent so far in 2021.

On Inflation

Not so long ago, “deflation” was a big concern among economists and market participants. But now, everyone seems to be talking about high expected inflation. “In general, we think that the market worries too much about inflation,” Fredrik Carlsson tells Finwire. “As the shopping basket is measured today, asset prices are not captured,” he continues. “In addition, there is price pressure in many sectors, including retail, where consumers are looking for the cheapest alternatives online, something that the pandemic has further accelerated as people who previously preferred physical stores have been forced to shop online.”

“In the long term, nothing has changed. We do not think inflation will rise dramatically.”

“There are bottlenecks in the economy, such as the situation with semiconductors,” Carlsson refers to the recent global semiconductor shortage that is contributing to fears that higher inflation is on the way. “But this is only temporary,” argues Carlsson. “In the long term, nothing has changed. We do not think inflation will rise dramatically.”

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Eugeniu Guzun
Eugeniu Guzun
Eugeniu Guzun serves as a data analyst responsible for maintaining and gatekeeping the Nordic Hedge Index, and as a journalist covering the Nordic hedge fund industry for HedgeNordic. Eugeniu completed his Master’s degree at the Stockholm School of Economics in 2018. Write to Eugeniu Guzun at eugene@hedgenordic.com

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