Stockholm (HedgeNordic) – On the surface, 2022 can be considered one of the worst years for Nordic hedge funds since 2008. After three consecutive years of solid performance, Nordic hedge funds fell 6.1 percent in 2022, the industry’s worst year since 2008. Looking beneath the surface, there were many positives to take from the challenging 2022.
The Good
One in Three Hedge Funds Enjoyed Gains: Although the Nordic Hedge Index ended 2022 in negative territoryby 6.1 percent, about one in every three constituents (31.2 percent) delivered positive returns for their investors. This group gained about 11 percent on average in 2022. About 68 percent of constituents outperformed the 11.5 percent loss one would have incurred by holding Swedish government bonds.
Strong Year for Trend-Followering CTAs: Both global and Nordic CTAs enjoyed one of their best years amid a lack of equilibrium across regions and asset classes. The index tracking the Nordic pool of managed futures vehicles ended the year up only 3.9 percent, as Estlander & Partners’ two futures-based cross-asset multi-factor vehicles dragged down the group’s aggregate performance. The eight managed futures vehicles in the Nordic Hedge Index (out of the ten) with positive performance for 2022 gained 14.4 percent on average. Lynx led the gains, ending the year as one of the top performers globally.
Strong Performance by Low-Net Equity Hedge Funds: Most Nordic equity hedge funds employ a long-bias strategy, which explains the group’s decline of 5.1 percent in 2022 after a return of 10.6 percent in 2021 and 15.8 percent in 2020. The smaller pool of low-net equity funds, which maintain market-neutral exposure or net exposure below 50 percent, enjoyed strong performance in 2022. The 18 low-net equity hedge funds in the Nordic Hedge Index returned 5.6 percent on average in 2022. The funds with predominantly net long – or variable – exposure incurred an average loss of 10.6 percent. The ten market-neutral equity funds ended the year with an average gain of 1.6 percent.
Solid Year for Funds of Funds: There has long been a discussion if funds of funds warrant their extra layer of fees and yet they continue to deliver solid and consistent risk-adjusted returns. The active Nordic funds of hedge funds either represent a “one-stop” solution to a respective asset manager’s hedge funds without charging an additional layer of fees or offer exposure to an often-inaccessible set of external hedge fund teams and strategies. The Nordic funds investing in external hedge funds gained 4.9 percent on average in 2022, while the broader pool of funds of hedge funds edged down 0.6 percent for the year.
Launches Match Closures: The Nordic hedge fund industry saw a similar number of launches and liquidations in 2022, as liquidations slowed down noticeably in the past two years. An estimated 11 new hedge funds were launched in the Nordic region during 2022, compared to eight in 2021 and 13 in 2020. The number of hedge fund liquidations declined in the past two years, with an estimated 12 funds shutting down during 2022, down from 16 in 2021, 32 in 2020, and 30 in 2019.
The Bad
With a decline of 6.1 percent, 2022 was indeed a bad year for the Nordic hedge fund industry. The bottom 30 percent of Nordic hedge funds lost 22.8 percent in 2022, with 20 funds incurring an annual loss in excess of 20 percent. 2022 was particularly challenging for fixed-income, multi-strategy, and long-biased equity fund managers.
Worst Year on Record for Multi-Strats: Within the Nordic Hedge Index, the multi-strategy category represents the most diverse and inclusive category, featuring both true multi-asset, multi-strategy funds and unique funds that do not fit any other clear classification. The category includes specialist hedge fund strategies focusing on volatility trading, life settlements, capital structure relative value, financing solutions, or hybrid securities. While some funds such as Svelland Global Trading Fund, Asset Opportunities and Ress Life Investments enjoyed strong performance in 2022, the multi-strategy group as a whole had its worst year on record as both stocks and bonds simultaneously had a horrendous year in 2022.
Bad Year for Fixed Income: Despite enjoying a gain of 7.7 percent in the final quarter of 2022, Nordic fixed-income managers ended the year in negative territory at 7.4 percent. Only one in every four fixed-income funds within the Nordic Hedge Index ended the year in the green, with Nordea European Rates Opportunity Fund topping the table. Nordic fixed-income managers, particularly those focusing on Danish covered bonds, faced a challenging 2022 as the era of ultra-low interest rates and quantitative easing abruptly came to an end with the arrival of high inflation.
2022 was a challenging year for virtually all asset classes, including hedge funds. However, the environment for alpha generation by hedge funds has been improving and should continue to improve into the new year. The pullback of central banks, for one thing, can facilitate a fruitful environment for trend-followers, stock pickers, and fixed-income managers.
