Just over two years ago, the Nordic fund scene saw the debut of an alternative fund focused on Nordic high-yield bonds, with a flexible legal structure, innovative investment framework, and a strong – yet expanding – team. Fast forward to today, Ridge Capital’s Northern Yield Fund has delivered an annualized net return of 18.4 percent over two years, marking this milestone with the EuroHedge Award for the “Best Fixed-Income Fund” in Europe. While the timing of the launch contributed to the fund’s strong performance, it’s the team’s flexible, opportunistic investment approach that has truly set Ridge Capital apart.

“We’ve only been around for two years and a half, so we know we have a long way to go to prove ourselves. But I’m incredibly proud of what we’ve achieved in such a short time.”

Christoffer Malmström, Co-Founder and Lead Portfolio Manager at Ridge Capital.

“We’ve only been around for two years and a half, so we know we have a long way to go to prove ourselves,” says co-founder and Lead Portfolio Manager Christoffer Malmström. “But I’m incredibly proud of what we’ve achieved in such a short time. To be nominated alongside funds that have been around for much longer and ultimately win the EuroHedge Award is a tremendous achievement,” he reflects on winning the award amid a group of strong-performing European fixed-income peers. “We couldn’t have asked for a better start. I’m proud of the team and everyone’s efforts, and it’s rewarding to see our hard work being recognized.”

Opportunistic Approach Drives Benchmark-Beating Returns

2024 proved to be a strong year for many Nordic high-yield bond managers, driven by tightening spreads, but Ridge Capital enjoyed a particularly strong year with a 25 percent net return. This performance can be attributed to Ridge Capital’s active and opportunistic investment approach. “Heading into 2024, we saw significant dislocations in certain sectors, particularly real estate, where spreads were over 1,000 basis points. Today, they’re trading at less than half of that and we were able to capitalize on the opportunity,” recalls Malmström, who co-founded Ridge Capital in 2022 with Måns Levin.

Breaking down Ridge Capital’s 25 percent net return in 2024, about half came from interest payments, while the other half was driven by price appreciation. Looking ahead to 2025, Malmström and his team do not foresee any significant sector dislocations. The correction of sector dislocations in 2023 and 2024 has led the Ridge Capital team to focus on idiosyncratic, case-by-case event-driven opportunities. “We remain opportunistic and highly active. We focus on identifying event-driven opportunities – bonds that are oversold, misunderstood, and trading at a discount for various reasons,” says Malmström.

“We remain opportunistic and highly active. We focus on identifying event-driven opportunities – bonds that are oversold, misunderstood, and trading at a discount for various reasons.”

Christoffer Malmström, Co-Founder and Lead Portfolio Manager at Ridge Capital.

Today, with high-yield bonds trading closer to par and credit spreads compressed, the team expects 2025 performance to be primarily driven by the portfolio’s coupons and running yield. “Any price appreciation from event-driven trades will be more of an icing on the cake,” Malmström notes. While performing credit remains the core return driver for Ridge Capital, the team also expects opportunistic trades tied to refinancing situations to provide additional upside in 2025. As some bonds approach maturity, refinancing risk presents both challenges and opportunities. “If refinancing proves difficult for certain issuers, there may be a need to inject equity or extend the bond’s maturity. In such cases, it’s essential to ensure that bondholders are protected and receive a fair return,” he explains.

“It’s tough to replicate a 25 percent net return this year, unless we see a broader market dislocation first. Short-term volatility and sell-off typically creates longer-term opportunities for outperformance.”

Christoffer Malmström, Co-Founder and Lead Portfolio Manager at Ridge Capital.

Since its launch in 2022, Ridge Capital Northern Yield has set its return target as 7 percent above the three-month STIBOR (Stockholm Interbank Offered Rate), which currently translates to approximately 10 percent net of fees. “We’re currently running at a gross yield of over 13 percent on a levered basis, so we are on track to meet that target,” says Malmström. “On top of that, we continue to focus on event-driven trades, which should contribute additional returns.” However, repeating last year’s performance will be a challenge. “It’s tough to replicate a 25 percent net return this year, unless we see a broader market dislocation first. Short-term volatility and sell-off typically creates longer-term opportunities for outperformance. But if we can achieve something in the range of 10 to 15 percent in 2025, that would be great.”

Benefits of an Alternative Fund Structure

Capitalizing on these opportunities can be a challenge for traditional, daily-traded UCITS high-yield bond funds in the Nordics. To better align with the specific characteristics of the Nordic high-yield bond market, Christoffer Malmström and Måns Levin opted for an alternative investment fund structure for their fund. This structure is much better suited to the dynamics of the market. “It’s like if we were in a a 400-meter race, and we’re starting 200 meters ahead of everyone else – it’s nearly impossible for them to catch up,” says Malmström. “Structurally, these daily-traded UCITS funds are at a significant disadvantage and will never be able to compete.”

“It’s like if we were in a a 400-meter race, and we’re starting 200 meters ahead of everyone else – it’s nearly impossible for them to catch up. Structurally, these daily-traded UCITS funds are at a significant disadvantage and will never be able to compete.”

Christoffer Malmström, Co-Founder and Lead Portfolio Manager at Ridge Capital.

“Anyone trading in this market would agree that the Nordic high-yield space simply isn’t liquid enough to support daily investor redemptions,” emphasizes Malmström. For many of these funds, the primary risk isn’t credit risk but rather the risk of sudden, large redemptions. “The biggest risk is not whether the bonds will default, but whether retail investors will withdraw a significant amount of money overnight, forcing the fund to sell assets under pressure,” he argues. This risk became particularly apparent during the COVID-induced liquidity crisis when several daily-traded funds were forced to halt redemptions as investors scrambled for liquidity.

Managers of daily-traded funds are increasingly focusing on managing liquidity risk, but this often entails holding a portion of their capital in cash or cash equivalents. “The opportunity cost of doing so is huge,” notes Malmström. “Our portfolio is running at a 13 percent yield—holding cash equivalents would substantially drag down returns.” As a result, many daily-traded UCITS funds adopt a more top-down approach to managing liquidity, often sidelining the bottom-up credit analysis that should be a core focus for bond investors. To maintain flexibility, these funds also typically hold highly diversified portfolios, which allow them to quickly unlock liquidity when necessary. “This approach not only demands considerable effort to track all holdings, but it also leads many funds to offer index-like exposure to the high-yield bond market,” Malmström adds.

On the equity side, buying an index or broad market exposure can be attractive, as history has proven over time the difficulties to outperform the market with active single-name selection. “But in credit, success is all about avoiding the losers. You don’t want index-like exposure, there’s a lot of low-quality debt out there,” emphasizes Malmström. “A more selective, bottom-up approach is essential if you want to outperform in credit investing.”

Focused Growth and Future Expansion Plans

Avoiding losers in bond investing demands thorough analysis and sufficient resources dedicated to each position. To maintain this focus, Ridge Capital has capped the assets under management for Northern Yield at €450 million while also expanding its investment team as assets grow – now reaching half of its planned capacity. “We have a relatively large team now. Currently, five of us are managing a portfolio of fewer than 50 holdings,” says Malmström. “During reporting season, that means each team member covers fewer than 10 portfolio companies, allowing for in-depth analysis and oversight.”

“If you get too big, the market’s depth simply doesn’t support it. Our goal is to consistently outperform and remain in the top percentile.”

Christoffer Malmström, Co-Founder and Lead Portfolio Manager at Ridge Capital.

Equally important, Malmström emphasizes the risks of managing an overly large fund in a relatively illiquid market. “If you get too big, the market’s depth simply doesn’t support it,” he explains. “At that point, you’re forced to buy bonds in the primary market and hold them to maturity, essentially delivering market returns minus fees – which, to me, is not attractive at all.” With Ridge Capital Northern Yield halfway to its maximum asset capacity, the team is exploring new investment vehicles with a broader mandate rather than chasing the same opportunities. “Our goal is to consistently outperform and remain in the top percentile.”

While the team has yet to finalize a plan, one idea involves extending Ridge Capital’s approach and expertise to new markets. “We’re exploring ways to apply our opportunistic, bottom-up investment approach to other jurisdictions as well,” says Malmström. “One possibility is a broader Northern European or pan-European credit opportunity strategy – one that continues to target double-digit returns but with low volatility.”