The Catella Nordic Long Short Equity (RC) hedge fund had a tough time last year. It fell by 13.8 percent and underperformed both the Nordic stock index and global hedge fund indexes. Although the fund has demonstrated a positive return of almost 32 percent since its inception in December 2010, and an average annual return of 3.6 percent over the same period, Catella Fonder decided to realign the fund's strategy and management in January 2019.
"The focus of the management is to increase gross exposure, lower net exposure and reduce the correlation with the stock market," says Elofsson when asked to paint the broad picture of what the revised strategy should achieve.
On the question of the single biggest change, the fund manager says that the realigned fund will be less dependent on the direction of the stock market, with a lower risk concentration towards individual factors and with a larger number of holdings.
"The risk and return targets are the same as before, which is to say an annual return of 5–10 percent with a standard deviation of the same amount. The biggest difference is that the fund will normally have a more market-neutral positioning and the risk will be built using gross exposure in individual names. The risk concentration towards individual factors can be expected to be lower than in the past, and there will be more long and short names."
Elofsson emphasises that the reduced covariance with the stock market is expected to be most apparent in an environment of increased market fluctuations, both upward and downward. The fact that the number of holdings in the fund is increased also requires a greater focus on risk management, both for individual holdings and for the fund as a whole.
The manager believes that the broad mandate in terms of net exposure could lead to the fund being both long and short overall. But investors should not expect it to have a built-in tilt towards the long side.
"We want the majority of the risk and return in the portfolio to come from company-specific risk, and we should therefore not expect the fund to have a strong long bias over time. One example of when the fund will be net short is in a market environment where we generally believe that pricing is too optimistic and we therefore see an asymmetric range of outcomes on the downside," says Elofsson.
The fund will not deviate from its value-driven focus, but the manager emphasises that buying companies just on low multiples is an overly simplified picture of reality.
"We are fundamental investors. For us, fundamentals are much more than just numbers, and it is important to have a focus and proximity with the companies, the market and competitors," explains Elofsson, continuing, "Our fundamental view of a company's value, while considering its valuation multiples, view of future growth opportunities, margin development and structural challenges is crucial for the fund's positioning. We believe that just buying low-multiple companies is an overly simplified picture of reality."
"We have a diversified portfolio of companies that we consider to be attractive on the long side, and companies whose valuations are too high on the short side. Valuation is an important parameter, but usually not enough to take a position. Our decision on whether to take a position or not is based on a number of factors. Simply put, you could say that our understanding of the narrative around a company and its stock is what creates the opportunity to take positions, where we have a different opinion than the market as a whole."