Stockholm (HedgeNordic) – Warren Buffett and Sir John Templeton are a small handful of successful investors who have deliberately decided to manage capital away from the noise surrounding the world’s leading financial centers. Similarly, Norwegian Cato Brahde has successfully been running the hedge fund he co-founded, the Oceanic Hedge Fund, back in 2002 from the remote Isle of Man in the Irish Sea, a remoteness that gives him a different perspective.

“We ran a shipping and offshore energy long-only fund back in the 1990s and we also ran a shipping bond fund from 2000 to 2006,” Cato Brahde discusses the origins of his long/short energy transition and shipping fund. “It was quite natural for us to start a hedge fund, it was just another string to our bow at the time,” he continues. The idea was to launch a diversified vehicle that would benefit from the cyclical nature of the shipping and energy sectors. The Oceanic Hedge Fund has generated an annualized return of about 8.0 percent over its nearly 20-year history.

“It was quite natural for us to start a hedge fund, it was just another string to our bow at the time.”

The Oceanic Hedge Fund started off its journey on a great note by enjoying eight consecutive years of positive performance, a period that also included the 2007-2008 financial crisis. “The theme in the early years was the integration of China into the world economy and the effect on shipping and energy demand that resulted from that,” explains Brahde, who heads a team of five – three of whom are Scandinavian – that runs the Oceanic Hedge Fund. “Clearly China needed to import a lot of commodities, and needed a lot of energy and shipping to manufacture and export its manufactured goods.”

“There is a similar situation now, but the underlying driver is a significant investment boom required for the energy transition,” says Brahde. The team behind the Oceanic Hedge Fund has been running a new energy strategy within one of its other funds since 2006, with the hedge fund employing this strategy since 2008. The new energy strategy seeks to pick up structural themes and identify companies that have the best technological and market position to become winners in the energy transition. “We are a bit of a pioneer in the transition business as well,” considers Brahde.

Four Strategies

The Oceanic Hedge Fund broadly employs four sub-strategies – three long-term-oriented and one short-term-focused – to build its predominantly long/short equity portfolio that maintains a net market exposure of around 30 percent. The new energy strategy and the oil and gas strategy, which collectively form the “energy” leg, comprise the longer-term-focused portfolio alongside the shipping strategy. “Investors don’t necessarily view energy transition and shipping as being very similar, but we look at both areas as being one very interesting, complete space,” argues Brahde.

“Investors don’t necessarily view energy transition and shipping as being very similar, but we look at both areas as being one very interesting, complete space.”

The investment process in these longer-term strategies relies on “structural and cyclical analysis,” according to Brahde. “Our approach is to identify the opportunity set and who is in a position to benefit from that opportunity set, complemented with a very strong valuation basis for stock selection,” explains the CIO. “We have always been driven by valuation, but we recognize that valuation by itself is not necessarily a great trigger for moves and stock prices.”

The shorter-term strategy is a systematic shipping strategy based on a proprietary satellite vessel tracking system called TRACS, which has been providing real-time updates on ship movements and cargo flows since 2011. “We initially started tracking all the ships going through the Suez canal in 2011, at the time of the Arab spring,” says Brahde. “Once we automated that, we thought that if we can track everything in the Suez canal, we can track everything all over the world.” Brahde and the team have been tracking all seagoing ships for the last 11 years.

“Our approach is to identify the opportunity set and who is in a position to benefit from that opportunity set, complemented with a very strong valuation basis for stock selection.”

“The short-term strategy seeks to exploit short-term supply-demand imbalances,” explains Brahde. “If we see a lot of ships going to Brazil to pick up iron ore to go to China, we can recognize there will be a short-term imbalance in the market,” the CIO provides one example of opportunities identified by the TRACS system. “Similarly, if you got too many ships going into any region to pick up any kind of product, you will have a bit of a short-term downcycle in vessel supply followed by a short-term upcycle,” he adds. “This TRACS system uses predictive analytics in a demand/supply framework to identify short-term imbalances that we can exploit.”

The Oceanic Hedge Fund typically maintains a portfolio of less than 100 positions, half of which are focused on shipping and the remaining half on energy. “Again, the energy is split, so there is effectively 25 percent of the total portfolio in oil and gas and 25 percent of the total in new energy,” explains Brahde. The allocation to each of these sectors and sub-strategies changes depending on the opportunity set. China’s ascension as the world’s largest energy producer and consumer was behind the long-term cycle in both shipping and energy in the first decade of this millennium. Brahde expects the energy transition to drive the next cycle in these sectors.

The Next Super Cycle

“Both shipping and energy industries run through reasonably long-term cycles,” starts Brahde. These cycles, in turn, are driven by long-term fundamental, structural shifts. “While China drove the cycle in both shipping and energy from 2002 to 2009, the energy transition is going to drive the cycle over the next decade,” argues Brahde. “There is a massive need to invest in new energy projects and the high oil and gas prices are speeding up the energy transition,” he continues. “Without high oil and gas prices, you really would not get the economic incentive to really push you out of oil. This situation obviously causes short-term pain in the economy, but it is an essential product in the energy transition.”

“While China drove the cycle in both shipping and energy from 2002 to 2009, the energy transition is going to drive the cycle over the next decade.”

“And similarly in shipping, we have had a decade of oversupply. People got carried away before the financial crisis by ordering far too many ships, followed by another wave of ship ordering in 2013-14,” says Brahde. “But now we have got a much more disciplined environment.” The team at Oceanic Hedge Fund expect “the cycles over the next decade to be higher highs and higher lows based on an improving structural return on capital as operators meet the new regulatory requirements and basically rise to the challenges of the energy transition, which is big within shipping as well.”

Experience in Both Up and Down Cycles

With nearly 20 years of running the Oceanic Hedge Fund, Brahde and the team “know what to expect from the up cycles and down cycles,” according to Brahde. “One advantage that we have over many people who have come into the industry in the last ten years is that we have seen that boom from 2002 to 2008 without getting carried away,” continues the CIO. “We made good money during that period, but we were also reasonably good at protecting ourselves from collapses,” says Brahde. “We have been around long enough to see both some up cycles and down cycles, and it is important to have lived through both to be able to maximize on the opportunities in any one cycle.”