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Idea’s Pursuit of Market Returns with Less Turbulence

Report: Systematic Strategies

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Stockholm (HedgeNordic) – In the vast and varied landscape of investment strategies and funds, one can find a wide array of choices, each promising distinctive outcomes and portfolio characteristics. Amongst this diverse array, there’s one stock-picking boutique that has charted its course solely in the equity space since 2006, PriorNilsson Fonder. It’s the home of a Sweden-focused long/short equity fund that aims to achieve market-like returns with much lower volatility.

PriorNilsson Idea, spearheaded by founder Torgny Prior and joined by Martin Lindqvist since 2014, has sought to demonstrate that market returns need not be synonymous with excessive turbulence. “Idea is a long/short equity fund with a net exposure that can range from around zero, never dropping below zero, to as high as 110 percent,” Torgny Prior introduces PriorNilsson Idea. The fund strategically allocates capital between interest-bearing instruments and equities, all with the main goal of mirroring equity market performance but at a much lower risk. 

“Idea is a long/short equity fund with a net exposure that can range from around zero, never dropping below zero, to as high as 110 percent.”

Originally launched in early 2006, PriorNilsson Idea began to employ more extensive hedging strategies to reduce return volatility from the beginning of 2014. Since the end of 2013, the fund has generated an annualized return of 11.1 percent with an annualized volatility of 10.5 percent. This benchmark-beating return has been accomplished with lower volatility compared to the broader market.

“We set our goal to generate market-like returns with an annual volatility of about ten percent and we have delivered as promised.”

“We set our goal to generate market-like returns with an annual volatility of about ten percent and we have delivered as promised,” Prior affirms. “Our performance has mirrored that of the stock market, but with less volatility over time,” he continues. “We have stayed true to our word, and we are satisfied with the results.”

Fine-Tuning the Exposure: the Toolkit

PriorNilsson Idea is actively working with allocation towards the stock market as a strategic element in the investment strategy. The portfolio management team uses three tools in its toolkit to adjust the fund’s net market exposure. “The first tool involves buying out-of-the-money put options on an index, typically the Swedish stock market,” starts Prior. “Most of the time, the strike price of these options is around five percent below the current level, which means that we do not hedge the first five percent of a stock market decline,” he explains. The hedge comes into play when the market experiences a more pronounced sell-off.

“The first tool involves buying out-of-the-money put options on an index, typically the Swedish stock market.”

While the use of put options remains a consistent feature in PriorNilsson Idea’s portfolio, the team occasionally sells index futures as a safeguard during more uncertain and volatile periods. “We have used this strategy more recently around the onset of the Covid pandemic, the outbreak of the conflict in Ukraine, and other instances,” Prior notes. The team can also engage in the direct short-selling of individual companies, or, more effectively, target a group of companies in the same sector to reflect a bet against that specific sector.

“We typically short-sell several companies in an entire sector we don’t believe in rather than shorting single companies. It’s very difficult to have a targeted short position against a single company because we could be wrong, or external developments, such as changes in ownership, could work against you,” according to Prior. For that reason, Prior opts to short a specific sector by choosing five or six companies within the large-cap space. This toolkit provides Torgny Prior with the flexibility required to adjust the fund’s net exposure, thereby safeguarding its long portfolio against major drawdowns.

Primarily Sweden-Dominated Long Positions

As a stock-picking boutique, PriorNilsson Fonder and its funds derive the majority of their returns from stock picking. This has also been the case so far in 2023. While the OMX Stockholm All-Share Index finds itself in negative territory for the year, PriorNilsson Idea has advanced by close to nine percent. Stock selection has driven much of this return in 2023. “We had higher net exposure at the beginning of the year, which we then reduced after a couple of months. Following a difficult summer for stock markets, we increased the exposure once more,” says Prior. “But the strong performance this year mostly reflects the selection of stocks in our portfolio rather than changes in net exposure.”

“The focus of the fund is the Nordic region, with a strong emphasis on Sweden.”

Sweden, as the home market of PriorNilsson Fonder, serves as the primary hunting ground for the firm’s stock-picking team. “The focus of the fund is the Nordic region, with a strong emphasis on Sweden. Over time, our investments outside the Nordics have averaged about 30 percent,” notes Torgny Prior. “We have made investments in large tech companies in the United States and companies like Louis Vuitton that one cannot find in the Nordics,” he elaborates. “However, we mainly focus on Sweden because we have a better knowledge and understanding of this market.”

“However, we mainly focus on Sweden because we have a better knowledge and understanding of this market.”

Launched in early 2002 by Torgny Prior and PO Nilsson, PriorNilsson as a firm has been dedicated to observing and analyzing Swedish companies for a long time. “We manage a series of long-only funds focused on Sweden, so we can borrow some ideas from those as well,” says Prior.

An Eye for Good Companies

Whether it’s the fund’s Swedish investments or its stock-picking pursuits across the broader Nordic region and internationally, Torgny Prior and co-portfolio manager Martin Lindqvist share a common objective: to find and invest in sound companies with favorable company-specific and industry-specific attributes. The journey begins with a comprehensive understanding of a company’s business model, strategy, and drivers of profit and growth. The team’s focus revolves around changes in these factors, whether driven by internal dynamics like a change in leadership or external influences such as macroeconomic shifts.

“We want to see stability and growth, as well as an attractive valuation level.”

Ultimately, PriorNilsson Idea seeks out investments in companies where misconceptions in the market prevail concerning the nature and future prospects of the business. “We want to see stability and growth, as well as an attractive valuation level.” Accordingly, the team has favored more solid, larger-cap companies, which outperformed their small-cap peers in 2023. “Our largest long positions in companies such as Novo Nordisk, Atlas Copco, and Volvo have all done well this year, but we also managed to avoid investments in companies that have performed very badly.”

In a financial landscape characterized by its intricacies and challenges, PriorNilsson Idea remains a steadfast beacon, continuing its pursuit of market-like returns with much lower volatility.

Risk Disclosure

Past performance is not indicative of future performance. Fund units may increase or decrease in value and there is no certainty that investors will recover the entire invested capital.

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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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