Stockholm (HedgeNordic) – Tidan Fund, a hedge fund focused on capturing capital structure opportunities, is approaching its third anniversary this October with strong momentum. The fund has achieved back-to-back record months, including a 4.7 percent gain in August, which the team describes as “one amazing roller coaster ride for the history books.” Year-to-date through the end of August, Tidan Fund has advanced 21 percent.

Launched in October 2021, Tidan Fund employs a capital structure relative value strategy similar to that used at Brummer-backed Carve, where Tidan Capital’s CIO and co-founder, Michael Falken, was a portfolio manager. Although Carve was shut down in mid-2020 partly due to “massive central bank interventions that have broken down the normal relationships between equity and credit,” Tidan Fund’s recent performance signals a normalization of these relationships.

“The last 16 months have seen a substantial increase in opportunities, mostly thanks to more dispersion in credit markets, particularly for companies experiencing stress related to their capital structure, structural issues, or competitive industry pressures.”

“The last 16 months have seen a substantial increase in opportunities, mostly thanks to more dispersion in credit markets, particularly for companies experiencing stress related to their capital structure, structural issues, or competitive industry pressures,” confirms Michael Falken. Despite rising interest rates in response to inflationary pressures, many corporations were initially able to manage their debt loads, which had been secured at low interest rates. “Fast forward to today and after a year and a half of higher rates, they are starting to eat into capital structure decisions,” says Falken. Although credit spreads are quite tight, “dispersion is very, very high, meaning the opportunity set is quite vast on a global basis.”

First Sleeve: Long Credit, Short Equity

The Tidan strategy capitalizes on this theme through a sleeve that combines long positions in credit and short positions in equity. “In this sleeve, we invest in credit instruments offering the best upside relative to credit and downside risk, while taking a short view on the same company’s common stock,” explains Falken, co-manager of Tidan Fund. This involves investing in various credit instruments – such as secured or unsecured bonds, convertible bonds, or single-name credit default swaps – while shorting the corresponding equity, either outright or through options.

“The main thesis is that companies facing structural challenges tend to raise more cash or implement dilutive measures that are detrimental to shareholders and positive for creditors,” says Falken. In essence, actions such as rights issues, asset sales, and dividend cuts increase the likelihood of debt repayment. This dual-leg alpha generation process, referred to as “value transfer” by the Tidan team, aims to “capture the economic value transferred from shareholders to credit holders inside a company’s capital structure,” according to Falken.

“The main thesis is that companies facing structural challenges tend to raise more cash or implement dilutive measures that are detrimental to shareholders and positive for creditors.”

“The compelling benefit of this strategy is the implicit carry that we harvest (current implicit carry is close to 17 percent) while positioning ourselves for positive credit events that can eventually enhance the overall rate of return by 25 to 50 percent,” Falken notes. The Tidan team has seen an increasing number of these value transfer events unfold this year, including at companies such as electric vehicle maker Lucid and the facility-based telco Lumen, both core positions in Tidan. This ‘long credit/short equity’ sleeve represents around 70 percent of Tidan Fund’s gross exposure.

Second Sleeve and Opportunities Ahead

The remaining 30 percent of gross exposure represents the team’s fundamental views on specific companies, involving long positions in perceived winners within a particular business or industry, short positions in weaker entities, or paired positions. The fund currently holds 27 such positions, consisting of outright longs, shorts, or paired positions. “This sleeve has also contributed positively with a Sharpe exceeding 1 and very low equity beta,” Falken adds.

Tidan’s investment process operates within a market-neutral framework, enabling the fund to maintain a low correlation with equity markets. This year has been no exception, with a realized correlation of just 0.07 against the S&P 500. August provided a clear example, with the strategy profiting from both the sharp equity sell-off in the first half of the month and the subsequent rebound. The fund’s 21 percent return through August marks a strong recovery from more challenging years, during which it lost 3.2 percent in 2023 and 9.1 percent in 2022. The normalization of equity-credit relationships has revitalized the Tidan Fund, with assets under management increasing from less than €50 million at the beginning of 2024 to over €75 million by the end of August.

“The approach has not changed, but the opportunity set has expanded.”

“The approach has not changed, but the opportunity set has expanded,” concludes Falken. The team anticipates that “the current highly lucrative environment will persist for many years, given the slim chances of central banks returning to negative rates again, and rates being higher for longer.” Moreover, with a significant wall of maturities ahead, “we’ve only begun to see the initial impact of corporate debt maturities and expect refinancing to become more challenging going forward, creating even more opportunities.”