Stockholm (HedgeNordic) – Structural shifts are a constant in an ever-transforming world around us, creating new opportunities and challenges for industries, businesses, and individuals. Determined to capitalize on structural winners and losers from these shifts, Linköping-based money manager Alexander Hyll launched Adaptive Paradigm Alpha back in early 2020. Following two years of successful management and several additions to the organization, Hyll and his team are launching a fully authorized alternative investment fund with the same strategy and name during the second quarter of this year.

The cornerstone in managing Adaptive Paradigm Alpha is identifying paradigms, which Hyll defines as measurable causal relationships between structural trends. “The next step is to identify large companies which take part of a certain paradigm. Our ambition is not to invest in early-stage companies,” emphasizes Hyll. “Instead, the key goal is to identify long-term opportunities, predict where economic profit pools are moving to in the value chain and to position our portfolio accordingly.”

“The key goal is to identify long-term opportunities, predict where economic profit pools are moving to in the value chain and to position our portfolio accordingly.”

To find relevant and feasible paradigm shifts, Hyll and the team organize the research process by monitoring major trends, such as technology, demography, and sustainability, that are continuously developing across the world. “While these three do not make up the full list, the vast majority of new paradigms fall within these categories,” Hyll continues. Technology, for instance, is increasingly playing a more critical role in the evolution of society, playing a powerful role in driving the most influential structural trends impacting consumer-facing industries.

Similarly, changing sociodemographics are altering consumption patterns, creating new lifestyles and habits such as increased demand for environmentally friendly food, clothing and energy, among many other things. Last but not least, “the green shift to preserve our earth creates a number of possibilities,” points out Hyll. “Tomorrow’s demand for cleaner electricity, transportation, and heating is reshaping global consumption for metals and materials.”

“The objective of our “quantamental” approach to researching paradigms is to identify opportunities for relative outperformance, which increases the predictability compared to stock-picking on an absolute basis.”

Many smaller – yet structurally strong – paradigms are born out of these three major trends, with the team at Adaptive Paradigm Alpha aiming to build a portfolio reflecting between six to eight paradigms at any given point. “The research process often spans several months and encompasses both quantitative and fundamental analysis, before a paradigm qualifies for our watch list,” elaborates Hyll. “The objective of our “quantamental” approach to researching paradigms is to identify opportunities for relative outperformance, which increases the predictability compared to stock-picking on an absolute basis.”

Adaptive Paradigm Alpha has identified a wide range of paradigms – just below twenty in total since inception, with returns from positions evenly distributed with a slight bias toward the long side. “Our balanced long-short attribution is a testimony to the repeatability and robustness of the fund’s strategy,” Hyll remarks.

Risk-Mitigating Options Strategies

So far, Adaptive Paradigm Alpha has been successful in capturing alpha from current and already-exited paradigms since launching in January 2020. The fund has delivered an annualized return of 10.3 percent since inception with an annual volatility of 2.3 percent, which translates into an inception-to-date Sharpe ratio of 4.4. The low volatility in returns stems from the team’s use of option strategies to capture alpha from paradigms while limiting downside risk.

“The fund uses option spreads to represent equity exposures to be able to customize the pay-out for positions,” explains Hyll. “We do this to limit the potential downside, but we also cap the upside to create a more cost-effective position,” he elaborates. In environments of dry liquidity in equity options, Adaptive Paradigm Alpha may employ a mix of cash equities to capture identified paradigms.

“The fund uses option spreads to represent equity exposures to be able to customize the pay-out for positions. We do this to limit the potential downside, but we also cap the upside to create a more cost-effective position.”

In addition to the extensive use of options strategies, which enable the Adaptive team to optimally control risk, additional safeguards are put in place for risk management purposes. “We fully beta- and currency-hedge every position to isolate paradigm-specific exposure,” says Hyll. The fund also relies on a hard stop at a negative ten percent for each position, which “is employed to reduce the impact of bias in investment decisions.”

Getting Ready for a Bigger Audience

Launched by a team of three, with Alexander Hyll as the main architect, Simon Hyll as Chief Technical Officer and Gustaf Lange as Chief Operating Officer, the team around Adaptive Paradigm Alpha has gradually grown to cement existing strengths as well as open new doors of opportunities. Lukas Börjesson joined Adaptive directly out of university as a quant-focused analyst, Arin Kamangar later joined as co-portfolio manager and the founder of IPM Informed Portfolio Management, Anders Lindell, joined as co-owner and board chairman.

“Anders brings extensive experience, both as a mentor for me but also as a business leader, having co-founded and held positions as CEO and Chairman of the board for Sweden’s previously largest hedge fund,” says Hyll. “While he is not involved in the day-to-day management of the fund in the role as Chairman of the Board of Adaptive, he helps us move forward by applying his knowledge of all fund management-related aspects, ensuring that the management company is set up to be able to deliver on our objectives.”

“Anders brings extensive experience, both as a mentor for me but also as a business leader…”

Based out of Linköping, the Adaptive team also seeks to benefit from the wealth of technical expertise of Linköping University’s current students and graduates. “Linköping University is well-known in Sweden for STEM-field research, with many graduates in engineering and mathematics each year,” highlights Hyll. “Most of these graduates leave the region when they graduate, especially if they want to work in finance since there are very few such opportunities in the region,” he continues. “By being located in Linköping, we have an opportunity to attract this talent that might want to stay here and work in finance.”

“Linköping University is well-known in Sweden for STEM-field research, with many graduates in engineering and mathematics each year. By being located in Linköping, we have an opportunity to attract this talent…”

Martin Singull, a professor in multi-variate statistics at Linköping University, is a part of Adaptive’s investment advisory board for regular discussions on methods of how to improve its quantitative models. “We know there is a wealth of expertise at Linköping University, and we have established ourselves in Linköping to be able to benefit from that”, comments Hyll. “And recently Ather Gattami, a leading scientist and expert within artificial intelligence and head of research at AI Sweden, has joined the investment advisory board to augment the fund’s strategy with regards to machine learning and AI driven research.”

Ready for Full-Scale Launch

Adaptive Paradigm Alpha was initially registered as an alternative investment fund by Swedish Finansinspektionen, with the fund’s management company operating as a sub-threshold alternative investment fund manager. Hyll and his team have now received authorisation from Finansinspektionen as a full-scope Alternative Investment Fund Manager, thereby broadening the potential investor base for Adaptive Paradigm Alpha. “The authorization is a big landmark for us, as it provides the platform from which we can distribute and market our investment services to a broader range of investors than we could as a registered manager,” says Hyll.

“The authorization is a big landmark for us, as it provides the platform from which we can distribute and market our investment services to a broader range of investors than we could as a registered manager.”

“Our management mainly caters to professional investors,” explains Hyll. “However, since we have some non-professional investors that have been with us from the start, we will be looking to distribute the fund via select distributors as well to accommodate these investors,” he elaborates. Now granted authorization, Adaptive Paradigm Alpha will be offered to both professional and non-professional investors in Sweden in the second quarter of this year.

“Our immediate objective in the near term is the launch of the fund to a broader audience,” emphasizes Hyll. “In the medium to long term, we want to continue developing our methods and become a reputable manager known for consistency and reliability,” he elaborates. “How big that can make us will be for the future to tell, although we hold big aspirations. We take one step at a time.” Designed to provide uncorrelated returns, downside protection and high risk-adjusted returns, Adaptive Paradigm Alpha now has the team, the backing and proof to do what it says on the tin: achieve paradigm alpha.

This article features in HedgeNordic’s “Nordic Hedge Fund Industry Report.”