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.
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.
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.
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.
Tangen has been chief executive of NBIM since September 2020 and was hired from AKO, the hedge fund he founded in 2005.
Drake Capital was a day-one investor in Tangen’s AKO fund in 2005.