Stockholm (HedgeNordic) – You’ll probably have a hard time guessing the top performing Nordic hedge fund over the last years. Nope, not that one. And not that one either.
The top performing fund in the Nordic hedge fund universe over the past five years is Svelland Capital’s Svelland Global Trading Fund run by Norwegian Tor A. Svelland, who launched the London-based commodity-focused manager in 2016. Svelland started his career in the shipping sector and later worked as Head of Freight Derivatives at Oslo-based Carnegie, Head of Commodities at Pareto Securities, and Proprietary Trader in commodities and freight at Goldman Sachs, and then at Trafigura. He then decided to set up his own hedge fund Svelland Global Trading Fund to exploit investment opportunities in commodity and related markets.
“With my background and experience from Klaveness, Carnegie, Goldman Sachs and Trafigura, I could see that there were opportunities in the market for a player like Svelland Capital,” Svelland tells HedgeNordic. His hedge fund, Svelland Global Trading Fund, has delivered solid returns during the first five years of operations using Svelland’s discretionary strategy reliant on deep fundamental analysis of physical commodity and associated freight markets.
“The key aspects of our strategy are that we are trading across three asset classes, which include commodity futures, freight futures and equities, and that we are only trading a smaller part of the commodity space.”
“The key aspects of our strategy are that we are trading across three asset classes, which include commodity futures, freight futures and equities, and that we are only trading a smaller part of the commodity space,” explains Svelland. Svelland Global Trading Fund, which has delivered an annualized return of 23.5 percent since launching five years ago in August 2017 through August 2022, does most of its trading in futures and equities related to LNG, crude oil, emissions, copper, aluminium and iron ore. “All commodity futures, freight futures and equities we trade are related to these underlying markets. We try to avoid being all-embracing and too diversified.”
Agnostic to the Type of Instruments Used
Svelland’s investment process always starts with understanding the “physical” aspect of these underlying markets, which involves analyzing the supply and demand dynamics of each commodity or underlying market. “Our portfolio positioning is all about the underlying markets,” says Svelland. “We are then looking for the best risk-reward and we use different tools and instruments to capitalize on the best risk-reward opportunities.”
The portfolio reflects the most attractive risk-reward bets, which could involve long-only positions in certain commodity futures, short-only positions in other commodity futures, or combinations of long and short positions in freight futures versus shipping companies or commodity futures versus commodity companies. “We are agnostic to what instrument we use,” says Svelland. “It really varies and depends on which we feel give us the best risk reward.”
“We are agnostic to what instrument we use. It really varies and depends on which we feel give us the best risk reward.”
“The instruments traded depend on the market,” continues Svelland. “If you look back at the 2017-2020 time period, especially in the summer of 2020, shipping was extremely out of favour and commodity markets hit rock bottom, so equities were trading at a massive discount. It was natural for us to be more long equities during those years,” explains the founder of Svelland Capital. “Equities are now priced in because of the commodity rally, so we have been flipping the book since the end of last year and we are now more active in commodity futures and are increasingly using short positions against those equities.”
The Core: Understanding Supply-Demand Dynamics
A nuanced, correct understanding of supply-demand dynamics in commodity and commodity-related markets is a prerequisite for good investment decisions in this space. “You assess what you think is the supply of one particular commodity and then you form a view of the worldwide demand,” says Svelland, who oversees a team of seven full-time employees at Svelland Capital. This understanding is paramount for successful investing in commodity markets. From 2002 to 2008, for instance, the commodity market was very strong due to China’s solid economic growth, Svelland notes. “It was a China story. At the moment, we have a different different story, it’s a supply story,” argues Svelland, one of the three portfolio managers at Svelland Global Trading Fund.
“The ongoing supply story is a bit more scary,” considers Svelland. “It doesn’t matter if you have strong demand, or you have a mild recession, or maybe a little bit weaker demand. We just don’t have the supply,” he elaborates. “That is what we learned in the energy sector and we are learning now in other markets like aluminium.” Several aluminum producers are closing down their mills due to rising energy costs and electricity bills, points out Svelland.
“There is actuallly less supply than we had six months ago, when it was already tight, but we do have demand coming off a little,” says Svelland. “Imagine what can happen six to 12 months down the road when demand is picking up while the supply will have been shrinking all the time.” All energy markets could witness higher prices going forward despite the posibility of a mild recession, considers Svelland.
2022 – A Trading Year
Svelland Global Trading Fund has delivered an annualized return of 23.5 percent over its first five years of operation and has a negative correlation to the broader equity markets. The fund incurred only one down year in 2018, the year US President Donald Trump started a trade war with China by imposing tariffs on the import of certain commodities. “The method in which Trump communicated to the markets (often through Twitter) and frequent back tracking made for a difficult trading environment towards the end of the year,” according to Svelland.
The fund’s solid performance in recent years stems from buy-and-hold investments in commodites, commodity companies, mining, oil companies and shipping companies trading at a deep discount. Svelland and his team usually make investments with an investment horizing between one and nine months. The story of 2022, however, has been a little different. “This year has been different compared to 2019, 2020 and 2021,” says Svelland. “2022 has been a trading year. In the environment that we have had so far in 2022, there is not a lot of buy-and-hold investment, you have to be active in order to deliver performance.”
“2022 has been a trading year. In the environment that we have had so far in 2022, there is not a lot of buy-and-hold investment, you have to be active in order to deliver performance.”
One of the strengths of the fund lies in the team’s ability and experience to trade the markets, to seize opportunities when they see them and equally important, to handle volatility that is inherent in the commodity markets at present, and to efficiently manage risk. Svelland Global Trading Fund’s investments in oil and tanker markets have been two of the strongest contributors to this year’s advance of 27.2 percent. “We have been doing very well with our oil trading and we have also been spot on in the tanker market,” says Svelland. “We have been long freight futures in the tanker space, which has been a tremendous trade, one of the best I have ever done.”