Norway’s Sovereign Hedge Fund Prepares to Flex Its Muscles

(Bloomberg Opinion) -- What happens when a hedge fund star takes charge of the world’s biggest sovereign wealth fund, with $1.3 trillion to play with? The fund starts to act a little less like a massive index tracker, and a little more like an adventurous hedge fund. So far, the shifts are subtle. But how much risk could wind up being too much for the owner of about 1.5% of the world’s equities?

Norway’s sovereign fund, whose proper title is Norges Bank Investment Management, has just released its Strategy Plan for 2021-2022. Naturally the fingerprints of Nicolai Tangen, who took over as chief executive officer in September after a successful career running Ako Capital LLP, are all over it.

For starters, the fund intends to become more aggressive in selling shares of companies when it anticipates a decline, particularly if it suspects a firm of playing fast and loose with its accounting. “Our aim is to expand our negative selection by underweighting stocks we expect to underperform,” the report says.

Tangen is on record as citing Wirecard AG, the German payments company that collapsed last year after fabricating its cash holdings, as an example. He told Bloomberg Surveillance in January that the fund “can add value” by being underweight in “risky situations” such as Wirecard.

The fund also plans to use more of its so-called risk budget, Trond Grande, the fund’s deputy chief executive officer, told my Bloomberg News colleague Lars Erik Taraldsen. It has previously limited the amount it has strayed from its benchmark to between 0.3% and 0.5%, but is permitted to diverge by as much as 1.25%. 

The strategy document says it will increasingly drift away from benchmark equity weightings when it sees an opportunity to profit by increasing “our active positioning around corporate actions and capital market events to enhance portfolio returns.” And more stock-specific selections are likely: “We will emphasize specific, delegated active strategies and have less emphasis on allocation or top-down positioning.”

Tangen has also said environmental, social and governance concerns will be a priority. To that end the fund has set aside about $14 billion to invest directly in clean energy infrastructure.

But deals are proving hard to come by in a crowded field where the sovereign fund has made a late start. BlackRock Inc., the world’s biggest asset manager with $8.7 trillion, has invested in more than 250 wind and solar projects in 13 countries. Its renewable energy unit oversees more than $9 billion. Last week, BlackRock said its third fund dedicated to the sector had raised $4.8 billion, almost double the amount it initially targeted.

After eight potential purchases Norway’s sovereign fund scrutinized last year all fell through, it announced its first transaction last week, a $1.6 billion agreement to buy 50% of the world’s second-biggest offshore windfarm from Denmark’s Orsted A/S.

Given that Norway’s wealth stems from its massive oil and gas industries, it does seem a little overdue for the fund to be making environmental amends by actively supporting renewable energy in addition to screening out carbon intensive companies from its portfolio. Sony Kapoor, founder of the think tank Re-Define, tweeted that the move is “far too little and far too late.” He’s been a long-time critic of what he sees as the fund’s failure to make the most of its freedom to invest for the very long term.

The fund also plans to increase its use of outside managers, mainly in emerging markets, by allocating as much as 6% of its capital to external funds from 5% at the end of last year and 4% previously. Tangen will likely look favorably on portfolio holders outside of the funds own stock pickers given his success in building Ako Capital into a $16 billion fund.

While the individual moves are modest, the collective direction of travel is clear: The fund will use its financial muscle and its privileged position to boost returns by taking on a bit more risk. With a $1.3 trillion portfolio, “you only need to create a small excess return in percent for it to turn into enormous amounts,” Tangen said when his appointment was announced.

But the reverse is also true. Losses can be similarly amplified. A year ago, I asked whether a high-flying hedge fund manager was really the best candidate to look after the nation’s savings. In the coming months and years, we’ll find out.  

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Mark Gilbert is a Bloomberg Opinion columnist covering asset management. He previously was the London bureau chief for Bloomberg News. He is also the author of "Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable."

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