Stockholm (HedgeNordic) – In recent years, fixed-income macro managers such as Carlsson Norén have struggled to deliver attractive absolute returns in a low-volatility environment driven by central bank interventions. After several years of muted returns, Carlsson Norén Macro Fund is showing again its ability to preserve capital in an uncertain and volatile environment.

“Some investors had sought returns of 10 percent in the bond market at low risk when interest rates were around zero or in negative territory,” says Fredrik Carlsson, one of the founders and portfolio managers at Carlsson Norén Asset Management. “One could only generate those returns by either taking high credit risk when credit spreads were historically low or selling volatility when volatility was historically low,” he elaborates. “We chose neither of these two options, so our strategy has not worked for a while in the low-volatility environment.”

“We chose neither of these two options, so our strategy has not worked for a while in the low-volatility environment.”

Carlsson Norén Macro Fund delivered an annualized return of 0.3 percent over the six years ending 2021, while the broader fixed-income segment of the Nordic hedge fund universe returned 4.1 percent per year. In 2022 however, Carlsson’s fixed-income-focused macro fund is one of the best-performing funds in this segment after advancing 3.5 percent year-to-date through mid-November, compared to a decline of nearly 12 percent for its peer group.

The Strategy

The strategy devised by Carlsson and co-manager Martin Norén seeks to generate steady returns without risking loss of capital by investing in liquid, high-quality AAA bonds that can be turned into cash in any type of market environment. The source of extra returns stems from the duo’s macro bets on central bank moves or interest rate movements with the use of derivatives.

“This strategy has survived all the crises and difficult market environments since its launch in 2008,” says Carlsson. The fund ended 2008 up 8.9 percent and gained 7.0 percent in 2011, a year characterised by financial market turmoil as a result of the European debt crisis. “However, the environment characterized by quantitative easing, low interest rates and low volatility was not lucrative for macro strategies such as ours,” continues Carlsson. This year, macro managers can find and capitalize on opportunities arising due to the transition from a macro environment of low inflation and low interest rates to one of significant inflation and interest regime change. “For years, we had to rely on a mean reversion strategy to generate some returns, now we are running a proper macro strategy again.”

“For years, we had to rely on a mean reversion strategy to generate some returns, now we are running a proper macro strategy again.”

“We managed to generate 3.5 percent in a challenging environment that was made even more difficult by the geopolitical tensions in Europe,” says Carlsson. “It’s not very prudent to short high-quality bonds when war is going on the continent. Every major escalation can result in a flight for safety,” he explains. “If we managed to generate this returns in this difficult year, we can do better next year.” Carlsson expects Carlsson Norén Macro Fund to be able to generate returns similar to those achieved in 2011 and 2012, when the fund returned 7.0 percent and 7.9 percent, respectively.

While aggressive tightening has been implemented to cool down inflation, central banks are constrained in their fight against inflation by raising rates because of high indebtendess among households, businesses and governments. “Central banks might not be able to respond to ongoing inflationary pressures,” reckons Carlsson. “As a result, there is the possibility of elevated inflation for a long time, partly because of a deglobalization process that is affecting value chains and inflation,” he elaborates. “Central banks may end up raising their inflation targets to 2-4 percent instead of 0-2 percent.”