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Squeezing Alpha From Energy Transition Sectors

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Stockholm (HedgeNordic) – The war in Ukraine and worldwide disruptions in energy markets strengthened the global consensus around the energy transition and added momentum to the push for renewable energy. Despite facing supply chain issues, energy transition-related sectors enjoyed a good year in 2022 from an economic point of view amid increasing demand. Equity investors exposed to these sectors, however, faced a more challenging year due to plunging stock prices.

“From an economic point of view, 2022 was a strong year that had a positive effect on our sectors,” says Jonas Dahlqvist, who manages an energy transition-focused long/short equity fund. Electric vehicle sales, solar photovoltaic installations, battery production, and large hydrogen projects all posted strong figures in 2022. Despite rising demand, share prices in energy transition-related sectors with a long-duration growth character fell more than the broader markets.

“From an economic point of view, 2022 was a strong year that had a positive effect on our sectors.”

Many businesses in the energy transition-related sectors are expected to generate most of their cash flows in the distant future, thereby exhibiting so-called long-duration attributes. The valuations of these businesses – as long-duration assets – are more vulnerable to an increase in the interest rate that is used to discount their future cash flows. Some energy transition-related sectors performed worse than global equity markets in last year’s rising-rate environment. “Electric vehicles, hydrogen, and wind power equipment were among the underperforming sub-sectors, while battery production, efficiency technology, and solar power equipment outperformed,” recalls Dahlqvist.

Squeezing Alpha

Despite stock markets plunging amid a flurry of interest rate hikes and recession fears, the fund managed by Dahlqvist and his team at Proxy P managed to squeeze alpha from energy transition-related sectors. “The high volatility of last year was tough to manage but it also created investment opportunities,” says Dahlqvist. Proxy Renewable Long/Short Energy ended 2022 among the ten best-performing hedge funds in the Nordics with a net-of-fees return of 24 percent for the SEK A share class. The EUR A share class returned 15.2 percent net of fees, and the USD B class returned 7.5 percent. “We are very pleased with our alpha generation of about 30 percent in our growth portfolio in 2022.”

“Alpha generation is a result of strong stock picking.”

“Alpha generation is a result of strong stock picking,” starts Dahlqvist. The fund’s strong performance in 2022 and previous years also stems from “our investment strategy of targeting the most attractive growth opportunities within every sub-sector based on a solid top-down and bottom-up analysis,” explains the portfolio manager. The team’s trading approach of trimming and adding to individual positions based on long-term target prices also contributed to alpha generation. Proxy Renewable Long/Short Energy has generated an annualized net return of over 30 percent since launching in late 2018.

“2022 was a tough year with war, an energy crisis, inflation, and interest rate shocks,” summarizes Dahlqvist. “We believe 2023 will be just as challenging, with a potential serious global recession that will affect us all negatively,” he emphasizes. Yet for all these headwinds, 2022 still enjoyed an acceleration in the energy transition, with record renewable energy installations and sales of electric vehicles.

“2022 was a tough year with war, an energy crisis, inflation, and interest rate shocks. We believe 2023 will be just as challenging…”

“These are likely to face a slowdown in the next year or two,” considers Dahlqvist. “We think that energy transition as a concept will show some defensiveness given the drivers behind it.” A well-crafted investment strategy and careful stock picking will be essential in the pursuit of positive returns from the sector. “From a market perspective, we were already in a bear market last year, which we expect to continue in 2023,” argues Dahlqvist. “The correlation between broader markets and our sector will remain high and stock-picking efforts will once again prove to be important.”

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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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