Stockholm (HedgeNordic) – Broad stock markets have staged a solid recovery since the bear-market low of mid-October 2022. Despite the passage of nearly one and a half years since that low point, Norwegian hedge fund manager Peter Andersland argues that we are still in the midst of a bear market rally, characterized by a short-lived upward trend amid a longer-term stock market decline.

“We consider the rally in global equities since October 2022 to be a bear market rally,” states Andersland, who came out of retirement to launch a ‘traditional’ hedge fund under Pensum Asset Management in early 2022. “Adjusted for inflation, most indices remain below their January 2022 highs. And even in nominal terms, only a few are above their previous highs thanks to a few names,” notes the fund manager, who co-founded Norwegian hedge fund powerhouse Sector Asset Management back in 1999. While Andersland acknowledges that the recent market rally has persisted longer than typical bear market rallies, he emphasizes the unpredictability of bear market rallies, saying “That’s the way of such bear market rallies. They are very hard to predict.”

“We consider the rally in global equities since October 2022 to be a bear market rally.”

Since its launch in early 2022, Peter Andersland’s opportunistic long/short equity fund has demonstrated a negative correlation of approximately 0.45 with global equities. Explaining the inverse relationship between Pensum Global Opportunities and broader equity markets, Andersland states that “although the fund has been positioned slightly net long since inception, we tend to outperform when the market is down and vice versa.” This is primarily attributed to the composition of the fund’s portfolio, wherein “the short book is colored by many bubble stocks and the long book holds value stocks, and gold as a defensive asset.”

Given Andersland’s anticipation of a bear market, the fund’s long positions are predominantly concentrated in uranium and uranium miners, gold and silver miners, and oil. The short positions are diversified across 35-40 positions, selected from thematic ‘fishing ponds’ representing three opportunity sets. Pensum Global Opportunities is effectively shorting “consumer discretionary consumption, broken business models, and hyper-growth stocks, where we have to enter a negative real discount rate to make the discounted cash flow value equal the current stock price.”

Performance

Reflecting on the fund’s performance since inception, Andersland summarizes, “The bear market rally cost us dearly, not because we were short, but because our longs were down or simply deadwood when the market rallied.” Pensum Global Opportunities closed 2022 with a 2.1 percent loss following a challenging fourth quarter. The fund ended 2023 in negative territory at 15.7 percent after the final two months of the year erased solid gains from the preceding three months ending October. Pensum Global Opportunities ended the first quarter of 2024 in positive territory at 3.3 percent, reflecting a gain of 6.7 percent in January, a loss of 10.7 percent in February, and an 8.7 percent increase in March.

“The bear market rally cost us dearly, not because we were short, but because our longs were down or simply deadwood when the market rallied.”

Analyzing the performance in 2024, Andersland highlights, “The poor return in February was driven by a significant correction in the uranium group, which declined by about 20 percent from mid-January highs, and the return of speculative fervor in the stock market that hurt our short book.” According to Andersland, “Gold miners lost money in both January and February despite the rising gold price.” However, the strong rebound in March reflects a rally in gold and silver miners from oversold levels. “Our uranium stocks were a mixed bag, with some staging a strong recovery whilst others were just deadwood. The short book contributed nicely to the month’s performance in a relatively strong month from global equities.”

“For us to be willing to take on significant equity market risk, we need to see the long-awaited recession, lower market valuations, and a shift towards more accommodative monetary policy.”

Andersland maintains his view that the markets are still experiencing a bear market rally and remains cautious about altering his views and positioning without clear evidence. “For us to be willing to take on significant equity market risk, we need to see the long-awaited recession, lower market valuations, and a shift towards more accommodative monetary policy,” he concludes. “As things stand, the coming months appear increasingly challenging from a liquidity standpoint,” he adds. “True, Yellen may pull another rabbit from her hat, but this would be seeing is believing. Not something we would speculate on.”