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The ART of Finding Right Tails

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Stockholm (HedgeNordic) – Philosopher Nassim Nicholas Taleb coined the term ‘Black Swan’ to describe the tendency to underestimate the likelihood of extreme, hard-to-predict events, such as rare and catastrophic market crashes. In contrast to the common practice of preparing for extreme downside events, a fund manager from Norway has set up a hedge fund designed to seek out and capitalize on extreme upside events.

“Our investment philosophy is based on the premise that people almost always vastly underestimate the probability of extreme events, as Nassim Taleb’s work elegantly describes,” explains Lars Mikelsen, who has been running the strategy behind Avanto Right Tail (ART) since May 2023. “Instead of finding extreme downside events, we found that it was more effective to look for extreme upside events, which are more common,” emphasizes Mikelsen. This approach inspired the name Avanto Right Tail, which was officially registered by Avanto Capital as an alternative investment fund with the Financial Supervisory Authority of Norway earlier in 2024.

“Instead of finding extreme downside events, we found that it was more effective to look for extreme upside events, which are more common.”

Lars Mikelsen

“What even professionals tend to forget is that in a geometric series like returns, the ‘wings’ are what really matters for the end result,” asserts Mikelsen. Avanto Right Tail’s long-biased portfolio features concentrated positions in liquid investments tied to various themes, including digital assets, cannabis, uranium, green materials such as copper and lithium, and tankers, among others. “There are many places where we look for themes, and a lot of good investment ideas have been generated from social media,” says Mikelsen. These ideas typically share at least one of two common traits.

“The first common trait is that, for some reason, big pools of capital are unwilling or unable to invest in a particular space, but there is a catalyst that will open the floodgates of institutional capital,” explains Mikelsen. “The second trait involves situations where price inelastic demand meets price inelastic supply, often found in specialized commodities.” Since Mikelsen started running the strategy nearly a year ago, Avanto Right Tail’s largest allocations have been to digital assets and uranium. These continue to be the fund’s primary focus within its concentrated portfolio of three to five themes.

Largest Allocations: Digital Asset and Uranium

Avanto Right Tail currently allocates at least one-fourth of its exposure to digital asset through the Grayscale ETH Trust, Grayscale BTC Trust, and Van Eck Solana ETN. “The set-up in digital assets since last year was extremely appealing,” explains Mikelsen. Firstly, the market was depressed, and Bitcoin had fallen out of the spotlight, according to the fund manager. Secondly, macro-level liquidity was tight but set to ease. “Then there was the Bitcoin halving, which passed this April. The Halving has historically been associated with large upswings in Bitcoin and the general digital asset space,” he continues. All of this, combined with the secular trend of increasing adoption of blockchain technology, has created a compelling investment opportunity.

“Our opinion is that the promotion of Bitcoin by companies like Blackrock, along with offering products that institutional investors are comfortable with, is a game changer.”

Lars Mikelsen

Last summer, Avanto Right Tail bought shares in the Grayscale-trusts at a significant discount of 40-60 percent net asset value. “Our thesis at the time was that these products would trade back to par at some point in the cycle,” Mikelsen recalls. Then came the major catalyst: the anticipated launch of several Bitcoin ETFs, which materialized in January of this year. “Our opinion is that the promotion of Bitcoin by companies like Blackrock, along with offering products that institutional investors are comfortable with, is a game changer,” emphasizes Mikelsen. He believes the market is witnessing a gradual “career-risk-flip” shift in attitude where not having any allocation to the crypto space, which was once considered prudent to protect one’s career, now carries the risk of jeopardizing it. “Thus, most institutions will end up buying some just in case and the more it goes up, the more it will suck everyone in.”

Avanto Right Tail also holds a sizable allocation to uranium through investments in Sprott Physical Uranium Trust, and the single-company stock ASP Isotopes. “I started researching and investing in the uranium space in 2020,” Mikelsen recollects. “Back then, I thought it was a classic boom-bust cycle in which too much supply capacity was built up and the price was too low to incentivize production,” he explains. Additionally, discussions about nuclear energy remained somewhat taboo, albeit without valid reasons, according to Mikelsen. 

“It turns out that it was much bigger than that. We have a full-blown nuclear renaissance in the West, accompanied by a massive build-out of capacity in the East and a growing realization that nuclear energy is carbon-free and a baseload energy source,” states Mikelsen. Moreover, with the surge in AI-driven electricity demand, previous supply and demand assumptions are being challenged, he notes. While uranium has gained traction lately, with more investment professionals incorporating uranium into their funds or personal portfolios, “I believe we have a long way to go.”

Investment Horizon, New Themes, and Risk Management

Avanto Right Tail achieved a net return of 36 percent in its first eight months of operation in 2023, followed by a 16.4 percent advance in the first four months of 2024. “We had a fantastic run in the digital assets space,” Mikelsen reflects on the performance. “Everything pales when measured against a crypto bull market,” he notes. Avanto Right Tail also had a good contribution from the narrowing or disappearance of NAV discounts on the Grayscale trusts. “We also had solid gains in uranium and tanker shipping,” adds Mikelsen. “We haven’t really made any money on the rest of the themes in aggregate so far, with some delivering modest gains and others resulting in minor losses.”

“We know that nothing lasts forever, so we are continually looking for new investment themes, and sometimes ‘seed-invest’ in new themes that we think can take over for our current themes.”

Lars Mikelsen

The fund maintains an investment horizon ranging from three to 36 months, with a particular focus on the 12 to 18-month timeframe. Mikelsen emphasizes the importance of remaining mentally agile and continuously questioning assumptions. “Sometimes things happen faster than we expect, sometimes slower,” Mikelsen observes, leading to fluctuations in the duration of exposure to specific investment themes. “We know that nothing lasts forever, so we are continually looking for new investment themes, and sometimes ‘seed-invest’ in new themes that we think can take over for our current themes.”

“Avanto Right Tail is supposed to be risky, that’s what generates the return.”

Lars Mikelsen

Employing a focused strategy centered on high-risk investment themes and assets like digital assets, cannabis, or uranium, Mikelsen emphasizes that “if you are looking for a fund that delivers a couple of percent over some benchmark with low volatility, you should look elsewhere.” When asked about the team’s approach to risk management, Mikelsen humorously echoes Harris Kupperman, who used to say: “Sometimes we start drinking in the morning.” Joking aside, with a risk-return profile like Avanto Right Tail, he underscores that investors should acknowledge that the fund “is supposed to be risky, that’s what generates the return.”

Photo by Rita Vigre Vølstad

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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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