Hedge Fund Inside Biggest Norway Bank Reveals Junk Bond Bet

(Bloomberg) -- Inside the biggest bank in Norway, a hedge fund is going over the bond issuers that lost their investment-grade status during the Covid crisis.

One of the strategies at DNB ASA’s Multi Asset fund is to identify so-called fallen angels and place bets on those that appear to have been unfairly demoted to high yield earlier this year.

“It’s a strategy that picks up risk premia in the fallen angels segment,” Anette Hjerto, who runs the fund from Oslo, said in an interview. “There will be good opportunities going forward after what has happened during the corona pandemic.”

The 17.5 milllion-euro ($21 million) fund employs eight strategies managed by different teams at DNB Asset Management, including equity long-short and fixed income. Its high-yield strategy returned 10.8% through Sept. 1 since starting in February, compared with a 4.2% decline in the Nordic high-yield market, according to index data compiled by DNB.

Hjerto says the fund is overweight Nordic high yield because it sold off more sharply than other markets during the Covid crisis. “Credit spreads have also taken longer to contract in the Nordics,” she said. “So there’s more relative value there than in global high yield.”

Entering September, Hjerto’s fund had its highest weight in its minimum volatility (long only)-strategy, “but cash weighted, the allocation is fairly balanced between the different strategies. We expect to give a larger weight to our new long/short-strategies going forward,” she said.

Hedging Risk

Hjerto’s overall strategy is to develop a multi-asset product she says can “compete with fixed-income funds.” That’s as years of record-low interest rates have undermined the logic of holding low-risk bonds.

“The purpose is to keep the risk low while delivering stable return over time,” she said.

“With the low interest rates today, bond funds won’t give the return and protection investors need in their portfolios when there’s volatility in the stock market,” Hjerto said. “We want to build a product in the alternative investments universe that can give downside protection.”

ESG

Hjerto said that investing in assets that meet environmental, social and governance goals “isn’t as developed” among hedge funds yet as it is with “long only funds.” But that may be about to change, and she says she’s now noticing greater interest from her clients for products with more of an ethical focus.

“A lot of things are happening within that space,” Hjerto said. “There are new hedge funds that have a strong ESG strategy or use ESG in the investment selection. It’s a market that is under development.”

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