Stockholm (HedgeNordic) – Christoffer Malmström and Måns Levin established Ridge Capital Northern Yield at the end of 2022, on the conviction that there was a gap in the Nordic high-yield market for a more active and more flexible strategy. During the inaugural year, their high-yield bond strategy topped 100 high-yield funds in their Morningstar category, delivering a net return of 12.8 percent. This performance positioned Ridge Capital on the map as one of the region’s most promising emerging hedge fund managers.
According to Christoffer Malmström (pictured right), lead portfolio manager of Ridge Capital Northern Yield, credit investing offers predictable and stable returns, if everything goes well. “If investors want higher returns, they can go out and buy higher-yielding bonds,” remarks Malmström. The challenge, however, lies in constructing a portfolio of high-yielding bonds that can avoid default events. “We didn’t have any drags in the portfolio from defaults last year, and that was one key differentiating factor versus our peers.”
“We didn’t have any drags in the portfolio from defaults last year, and that was one key differentiating factor versus our peers.”
In 2023, the Nordic high-yield default rate stood at around 4.5 percent, impacting the performance of some high-yield bond portfolios. While this default ratio does not reflect the actual loss incurred by bondholders, “it is an indicator that the health of high yield issuers has been worse than in 2022,” says Malmström.
Flexible Portfolio Structure and Active Management
Leveraging an alternative structure tailored for professional investors, Ridge Capital Northern Yield capitalized on this flexibility by maintaining a more concentrated portfolio of about 40 different bonds across around 30 issuers. “Our performance in 2023 is underpinned by our thorough due diligence process for every new investment, as we have a much more focused portfolio with fewer companies,” explains Malmström. “Given our more focused portfolio, we spend much more time on every investment than a typical corporate bond fund, which often spreads its investments across over one hundred companies (issuers) with just two fund managers.”
“Our performance in 2023 is underpinned by our thorough due diligence process for every new investment, as we have a much more focused portfolio with fewer companies.”
Another feature of the team’s strategy that has helped avoid problematic situations is a much higher portfolio trading activity. Malmström highlights their commitment to active management, stating, “We don’t just buy a freshly issued bond, hold it until maturity, collect coupons and hope that the issuer will not default in the end.” He emphasizes the focus on taking advantage of market inefficiencies and volatility driven by fund flows and other developments, saying, “You just leave a lot of alpha on the table if you are not taking advantage of that in the secondary market.” The team’s activity in and out of some issues can be driven by company or sector-specific events and developments, relevant to different segments of the high-yield market.
Strategic Leverage and Legacy Portfolio Advantage
The Luxembourg RAIF format of Ridge Capital Northern Yield also enables the team to employ structural leverage of around 150 percent. This leverage allows them to invest in bonds with better credit quality while still aiming to generate a target return of seven percent above STIBOR. Additionally, this structure enables Ridge Capital to employ hedges within the portfolio to reduce spread-widening risks and volatility using derivatives.
“If we can avoid defaults like we did last year, returns in 2024 could be quite attractive, resembling equity-like returns but with significantly lower risk.”
Having launched in early 2023, Ridge Capital also sidestepped challenges associated with legacy portfolios. “Looking back, we enjoyed a perfect timing for the launch,” acknowledges Malmström. “Many funds that carried a legacy portfolio into 2023, built and priced in a different interest rate environment, found themselves in several default discussions with bondholders and shareholders, and I’m convinced this will happen again to them in 2024,” he adds. “We managed to avoid the situations where bondholders lost quite a bit of capital, partly due to timing but mainly due to our thorough due diligence and analysis process.”
Entering 2024 with an underlying unlevered yield-to-maturity of about 15 percent and a leveraged YTM of around 21 percent, Ridge Capital Northern Yield appears well positioned for another solid year. “Our portfolio’s underlying spread continues to average above 1,000 basis points, indicating that despite potential rate declines, our investors can still expect robust yields,” concludes Malmström. “If we can avoid defaults like we did last year, returns in 2024 could be quite attractive, resembling equity-like returns but with significantly lower risk.”