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Norway’s $1.8tn sovereign wealth fund has made its first investment with an external hedge fund betting on rising and falling stock prices, and plans to allocate billions of dollars more to this strategy as it tries to boost returns.
Norges Bank Investment Management, which runs the giant oil and gas fund and is headed by former hedge fund boss Nicolai Tangen, told the Financial Times it had invested in a long-short strategy in January and was looking to give mandates of about $250mn to other such managers.
“We are currently evaluating long-short strategies in Europe and US,” said Erik Hilde, global head of external strategies at NBIM.
“The marketplace is changing” and has grown both in terms of the number of smaller, privately owned managers that NBIM might invest with and the amount of assets that these funds managed, he added.
NBIM’s move comes as some investors grow increasingly concerned that equity market valuations look stretched and that simply owning a long-only portfolio of stocks may no longer be the best way to make money from markets.
Global stocks sold off sharply on Tuesday amid fears over the impact of US President Donald Trump’s trade tariffs.
Equity long-short — a strategy pioneered by Alfred Winslow Jones in 1949 — is the oldest type of hedge fund. Managers take bets on stocks they believe will do well and against names they believe will fall in price.
Many of these funds have suffered outflows in recent years, however, due to weak performance and as big institutional investors switch into cheaper, passively run portfolios.
NBIM, which invests with 110 external managers running long-only strategies, said it hoped the new mandates would deliver more than its current external managers’ long-run average of 1.8 per cent above its benchmark per year after fees. NBIM already runs long-short equity strategies internally.
Hilde said the strategies would be held in separately managed accounts. Managers running these accounts would bet on falling prices by borrowing stocks held in NBIM’s large index portfolio to sell in the market, meaning the fund would not be overall net short any company.
Managers would short stocks “exposed to high valuation, fraud and unsustainable business models”, he added.
The firm said it had not decided how many mandates to award and that it would depend on the managers that applied for them. Fees will largely be based on fund performance. In the US it will initially target managers in the technology and healthcare sectors.
NBIM is looking to invest with smaller, privately managed organisations because they “more often have a higher excess return than larger ones because of a better alignment of interest, a compensation structure strengthening this alignment, and being better at attracting, retaining and growing talent”, it said.
The firm is looking at a range of long-short equity strategies, including those that balance short bets against long bets, and those tilted towards rising or falling prices.
Tangen has been chief executive of NBIM since September 2020 and was hired from AKO, the hedge fund he founded in 2005.
The sovereign wealth fund, set up to manage the country’s oil and gas revenues, has delivered annualised returns of 7.5 per cent over the past decade. A bumper year for US technology stocks last year helped the fund achieve a 13.1 per cent return.
More than 70 per cent of the fund is invested in equities, 27 per cent is in fixed income and 2 per cent in unlisted real estate. The fund has consistently asked the government for permission to invest in private markets, a request that has been rejected by the country’s finance ministry.
Calum Kapoor is a reporter at MandateWire, a news service published by FT Specialist
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