Stockholm (HedgeNordic) – One of the world’s largest sovereign wealth funds has been breeding talent for the Nordic hedge fund industry. A team of Danes with a professional background from the Abu Dhabi Investment Authority (ADIA) launched a trend-following fund called Wavebreaker in early 2022. This year, a team of Swedes who spent most of their careers abroad, most recently in Abu Dhabi at ADIA, launched an absolute return fund called SilverDome One.
Robin Thörn and Jens Olsson, who most recently worked together at ADIA, returned to Sweden to launch an absolute return investment product to manage their own capital and that of fellow investors with a high aversion to risk. “Because we put in the majority of our savings into the fund, it was important for us to avoid building a strategy that enjoys seven strong years for performance followed by an eight year that is disastrous,” says Olsson. “Capital preservation is as important as capital appreciation,” corroborates Thörn. “A lot of our product design and our portfolio construction process is based on reducing drawdowns.”
“A lot of our product design and our portfolio construction process is based on reducing drawdowns.”
Risk Premia and Other Strategies
SilverDome One employs a diversified approach to invest in a wide range of asset classes, strategies, countries, and sectors. “We are starting with a huge universe of asset classes and strategies, some of which we have developed ourselves and others that we came across during our long investment careers,” explains Olsson. The duo then investigates which asset classes and strategies have attractive risk-return characteristics over a long period. “There are certain asset classes and strategies that may be able to print good returns for a while and then experience a huge fat tail,” says Olsson. “We just don’t include such strategies in the portfolio. We put together a set of strategies to create a portfolio that is balanced to cope with different market environments.”
“We put together a set of strategies to create a portfolio that is balanced to cope with different market environments.”
The portfolio of SilverDome One is invested in various asset classes using select equity strategies, wide range of bonds and commodities, among others. “We are in many asset classes, but we seek more targeted exposure to factors,” explains Olsson. “Momentum, for example, is a powerful factor that has stayed for a century and even more,” elaborates the SilverDome co-founder. The duo seeks to find ways to capitalize on momentum without being exposed to the dangers of momentum: sudden and rapid shifts in the trend.
“All in all, we are in most of the asset classes that investors are aware of, but maybe in a different way than most investors,” emphasizes Olsson. “We tend to have strategies that are designed a little bit differently than broad-based index exposure.” The team avoids relying on any individual driver, whether it is the actual holdings or the techniques used for adding value.
“We are in most of the asset classes that investors are aware of, but maybe in a different way than most investors.”
Individual risk premia, however, are not absolute return strategies and may not generate returns in all market environments. The team running SilverDome One also makes so-called “alpha” calls on which “out-of-favor” strategies will start delivering returns. “We have a systematic alpha engine to find parts of the market that for whatever reason are out of favor in the current market environment,” explains Thörn. “Relying on a systematic approach to analyze a lot of data points, we may look for risk premia that have tailwinds over time but are now unfavored. We are betting on something that over time will do well,” says Thörn. “This alpha engine will add to the performance over time.”
Humbleness and Risk Calibration
Most institutional investment processes assume that putting together a well-balanced portfolio often requires accurate foresting of expected returns, standard deviations, and intra-asset and -strategy correlations. Jens Olsson’s extensive background as the Head of ADIA’s Investment Risk, Strategy, and Planning Department taught him that “you need to be very humble about your forecasting even when you have the best resources, people, and tools at your disposal.”
For that reason, SilverDome One uses a portfolio construction technique that is less sensitive and dependent on these forecasts. On top of this, the team also uses a risk calibration system to reduce drawdowns in certainmarket scenarios. “The question we always ask, regardless of where we are in the investment process, is what happens if we are wrong?”
“The question we always ask, regardless of where we are in the investment process, is what happens if we are wrong?”
“The risk calibration model has an asymmetric return profile,” explains Olsson. “When it’s wrong, performance does not suffer too much. But when it’s right, we are very right and can reduce large drawdowns in the portfolio,” he elaborates. According to Thörn, the risk calibration model focuses on finding those big shifts and dislocations in the market that can hurt investor portfolios. “It is driven by a systematic approach that has proven very useful to us over time by allowing us to take a bit of risk off the table,” says Thörn.
“Since we’d rather be invested than not, this risk calibration model is only triggering signals when it’s wiser to step back and tone the exposure down a little,” argues Thörn. “That does not mean that we go all cash or put everything into a safe-heaven asset class, but it means that you can dial down a little bit and gently take down the risk level,” concurs Olsson. “You want to be invested most of the time since you get compensated over time by investing in the asset classes and strategies that we invest in.”
Expectations
SilverDome One represents a combination of asset classes and strategies uniquely constructed with an alpha component, assisted by a risk calibration model. Back-testing over decades show that the combination of these three elements exhibits an average annual volatility of about 10 percent. The duo expects SilverDome One to exhibit annual volatility in the range of 8 to 12 percent. With a targeted Sharpe ratio above one, SilverDome One is designed to generate an annual return between 8 and 14 percent over the long term.
“We could filter out the things that we don’t believe have any real value.”
“We started really with a clean sheet of paper, trying to first come up with the principles that we believe in and identify the things that we don’t like and that we don’t believe in,” Olsson recalls the strategy design process. “This process is different when you are trying to build a product for your own money because no one is trying to impress anyone, no one is trying to get the next job in the career,” he elaborates. “We could filter out the things that we don’t believe have any real value. We wanted to create a fund that has the potential to generate positive returns regardless of the economic and market environment.”
