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A Light-Footed Shipping-Only Strategy

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Stockholm (HedgeNordic) – Joakim Hannisdahl, the world’s best-ranked sell-side analyst in the shipping sector for several years, has launched a long/short shipping-only equity fund to put his skills to work. Launched in October 2021 within a Norwegian alternative investment fund structure, Cleaves Shipping Fund has so far capitalized on Hannisdahl’s skill set after advancing 40 percent since inception through the end of May. Hannisdahl and the team at Cleaves Asset Management have now launched the fund in an Irish structure to open up access for a larger investor audience beyond the Norwegian market.

“As an analyst, my recommendations have been quite successful at outperforming both the shipping index and the analyst consensus, so investors started asking me if I could manage their money instead of seeking advisory,” Hannisdahl recalls the early days of his plan to embark on a journey in the money management industry. “The skill set I have developed over the years adds more value in the asset management industry than in sell-side research.” So far, Hannisdahl’s conviction has proved right, with Cleaves Shipping Fund delivering strong returns in an extremely difficult market environment for most managers and investors.

“The difficulty of investing in shipping is that the sector is quite cyclical. Few companies survive more than a cycle or two without raising equity to shore up their balance sheets, so you need a long/short strategy to be successful in shipping.”

With the frequent cycles of booms and busts coupled with the low returns on capital over a full cycle, the shipping sector may have been out of favor with many fund managers. This cyclicality is what makes shipping a fertile hunting ground for Hannisdahl. “The difficulty of investing in shipping is that the sector is quite cyclical,” explains Hannisdahl. “The easiest way to become a millionaire is to invest a billion in shipping,” he laughs. “Few companies survive more than a cycle or two without raising equity to shore up their balance sheets, so you need a long/short strategy to be successful in shipping.”

Classically Cyclical and Volatile

The shipping markets are classically cyclical and extremely volatile due to a combination of supply and demand drivers. On the demand side, the shipping cycle tends to be influenced by the business cycle of the wider economy. On the supply side, the cycle is heavily dependent on shipowners’ decisions on their fleet size, as well as the long build times and working lives of vessels. “The overarching characteristic that affects all shipping segments is the supply-demand dynamics, with inertia on the supply side due to rather long build times and very responsive demand,” explains Hannisdahl. “You can see very high fleet utilization at some points in time and very low utilization at other points.”

“The overarching characteristic that affects all shipping segments is the supply-demand dynamics, with inertia on the supply side due to rather long build times and very responsive demand.”

“When demand goes up, the process of adjusting the fleet size is very slow, leading to high earnings and shipowners ordering ships with delivery in two to three years,” elaborates Hannisdahl. Demand may be tapering off by the time the newly-ordered ships are delivered, leading to broad-based declines in earnings. “That is the basics for all shipping segments,” says Hannisdahl. More importantly, each shipping segment – such as containers, tankers, dry bulk or gas carriers – follows its own cycle and exhibits different cyclical properties, according to Hannisdahl, “which enables added diversification from different cyclical and counter-cyclical strategies.”

Hannisdahl’s investment process, therefore, starts off by identifying the cyclicality of each shipping segment. “When we identify a shipping segment at a cyclical trough and we want to invest because we see a low order book, demand growth and foresee a good story going forward, we look for companies with strong balance sheets at the bottom,” says Hannisdahl. “You don’t really know how long the cyclical trough can last, and it is very hard to find and predict the inflection point,” he elaborates. Cleaves Shipping Fund, therefore, seeks to invest in companies with strong balance sheets that allow them to survive a prolonged trough without the need to raise equity capital.

“If we are confident in the balance sheet and confident in the cyclical expansion over the coming year or two, we could easily invest in an attractively valued company from a given sector and then sit and wait patiently.”

“We only invest if we believe we will get a handsome return from dividends and share price appreciation,” continues Hannisdahl. “If we are confident in the balance sheet and confident in the cyclical expansion over the coming year or two, we could easily invest in an attractively valued company from a given sector and then sit and wait patiently.”

A Light-Footed Shipping-Only Fund

Cleaves Shipping Fund predominantly builds its exposure using equity securities, but can also invest in derivatives, forward freight agreements, debt instruments or preferred shares, among others. The fund usually maintains a portfolio of 20 to 30 equity positions, both long and short, occasionally complemented with derivatives positions and other investments. “We often have a sizeable cash position. We may hold between zero and 40 percent in cash,” says Hannisdahl. “We don’t want to invest without seeing a clear opportunity.”

“We often have a sizeable cash position. We don’t want to invest without seeing a clear opportunity.”

The long/short equity-focused fund also opportunistically engages in short selling, particularly in anticipation of or amid the contraction phase of a cycle, with Hannisdahl shorting securities either as part of a standalone trade or as part of a trading pair. “We are a bit prudent with the shorts, as there is no limit to the downside when going short,” points out Hannisdahl. “We do not leverage the portfolio by going short and then spending the money on the long positions. There is enough leverage in shipping markets as it is, so there is no need for additional leverage.”

With all shipping segments exhibiting statistically insignificant correlation with the broader equity market and between each other, shipping exposure can improve diversification in a broader portfolio. “Shipping is very good for both portfolio composition and investment management as opportunities arise due to high volatility and cyclicality,” argues Hannisdahl. Successful investing in shipping markets, however, requires strong expertise, long experience and agility.

“Shipping is very good for both portfolio composition and investment management as opportunities arise due to high volatility and cyclicality.”

For that reason, Hannisdahl seeks to raise a maximum of $200 million in assets under management for the time being. “We never want to raise more money than we are confident that we could deploy without drifting away from our core investment strategy,” says Hannisdahl. “We need to be quite light-footed to be able to monetize on unforeseen events in the market.”

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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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