Stockholm (HedgeNordic) – Ola Björkmo and Jonas Sandefeldt, known for developing the systematic market-neutral strategy behind QQM Equity Hedge, are spearheading the launch of three new funds under the umbrella of Meriti Capital. Two of the funds – a market-neutral equity fund and a pure long-only fund – are scheduled to debut this Friday.
The now-closed QQM Equity Hedge employed a systematic strategy focusing on capturing fundamental momentum in listed European companies. This involved taking long positions in companies surpassing profit and turnover expectations and, simultaneously, taking short positions in those that failed to meet expectations. While also concentrating on capturing fundamental momentum across different regions, the upcoming Meriti Neutral reflects an evolution and enhancement based on the duo’s learnings from QQM.
“We have made some changes that we feel are going to make the fund a little bit better,” says Sandefeldt, who is Head of Systematic Fund Management at Meriti Capital. These changes come alongside additional expertise, with the pair joined by Gustav Andåker as Head of Discretionary Fund Management and Hans Turitz as Portfolio Manager.
Whereas QQM Equity Hedge was structured as a monthly-traded alternative investment fund, Meriti Neutral, along with Meriti Capital’s other funds, is structured as a UCITS fund, catering to both institutional and retail investors. Due to UCITS regulations restricting the short selling of individual companies, Meriti Neutral employs a total return swap to capture returns from deteriorating fundamental momentum. The long equity portion of the portfolio involves direct investments in equities, while the short equity portion combines cash or liquid instruments with a total return swap referenced to the return of the shorted positions. The liquid element serves as collateral for the total return swap, which provides for the returns linked to the downside performance of specific equities.
“The hard rule under the UCITS structure is that one cannot go short individual names, but one can reduce exposure and risk using derivatives such as swaps.”
“The hard rule under the UCITS structure is that one cannot go short individual names, but one can reduce exposure and risk using derivatives such as swaps,” explains Björkmo. “We will need to hold highly liquid cash, government bonds, or treasury bills through the brokering bank as collateral for the total return swap.” After establishing the long equity positions and allocating necessary collateral for the total return swap, Meriti Neutral remains with around 60 percent uninvested cash, offering potential for additional returns.
Allocating Uninvested Cash to Bonds
“Since the fund is market-neutral, we will have a lot of cash in the portfolio as we had before. But we have changed our approach of investing that cash,” reiterates Jonas Sandefeldt. At QQM, the pair used to allocate the excess cash in green bonds, “with absolutely no performance attribution at all,” he recalls. Gustav Andåker, in his role as head of discretionary management, now manages the excess cash by investing in bonds, taking an active approach to building and managing Meriti Neutral’s corporate bond portfolio.
“Since the fund is market-neutral, we will have a lot of cash in the portfolio as we had before. But we have changed our approach of investing that cash.”
“We rely on an active approach and we don’t go close to the benchmark at all,” says Andåker, who has spent the past ten years of his extensive career focusing on fixed-income investments. “The Swedish bond market, for instance, is quite deep in real estate, while the Norwegian one has a lot of exposure to oil and shipping as the largest sectors. We will be a lot more diversified compared to benchmarks,” he elaborates. “We don’t follow the index at all and are quite focused on the names in the portfolio.”
“We rely on an active approach and we don’t go close to the benchmark at all.”
With approximately 60 percent excess cash, the team anticipates a 60 percent return contribution from the market-neutral equity strategy and additional returns from corporate bond investments. Ola Björkmo emphasizes the strategic benefit, stating, “We believe it will be absolutely better for investors that we allocate some of the cash to the corporate bond market using an active approach.”
Sandefeldt notes the addition of beta exposure through corporate bonds will contribute positively over the long term. “We design our market-neutral strategy to be neutral on a beta basis and all other factors. Despite our efforts, we have observed that our strategy tends to perform a little bit worse when stock markets are doing well compared to periods when the market is trending sideways or down,” acknowledges Sandefeldt.
“Given our slightly negative correlation to the stock market, adding some beta and reducing the negative beta that we had before will contribute to improved performance in the long run.”
As corporate bonds exhibit a higher correlation to the equity market than government bonds, the additional allocation to bonds will inject some beta into the market-neutral portfolio, enhancing its performance over the long term. “Given our slightly negative correlation to the stock market, adding some beta and reducing the negative beta that we had before will contribute to improved performance in the long run,” says Sandefeldt.
The Long-Only Product
The quantitative strategy developed by Ola Björkmo and Jonas Sandefeldt seeks to discern winners and losers by tracking profit and turnover expectations. Over the long term, companies with rising profits and/or increasing turnover are rewarded with rising share prices, and vice versa. While Meriti Neutral aims to identify and invest in the top 20 percent of winners and gain short exposure to the top 20 percent of losers, the firm’s pure long-only fund, Meriti Ekorren Global, exclusively invests in the predicted winners worldwide.
“The fund will capture fundamental momentum in different geographies around the globe,” explains Ola Björkmo. “We will leverage similar information that the hedge fund relies on,” he elaborates. “This fund will not be using swaps, we will be investing in cash instruments.” Meriti Ekorren Global also plans to adjust exposure to different regions based on the relative fundamental momentum in those regions, offering investors a plain global equity exposure to companies positively developing, with ties to global economic growth.