Hedge Fund Hidden in Biggest Norway Life Insurer Shorting Euroby
1) The market volatility that Donald Trump’s election victory has triggered is good for hedge funds and
2) Europe faces a wave of political risk, meaning there are more losses ahead for the euro.
That’s how a hedge fund operating inside Norway’s biggest life insurer views the world. Since its creation in 2007, the fund hasn’t had a single year of losses.
Lars Mouland, who oversees 1.2 billion kroner ($140 million) as manager of the KLP Alfa Global Rente fund at KLP Kapitalforvaltning AS in Oslo, is shorting the euro against the pound. He’s also betting Europe’s single currency will fall against the Norwegian krone and the Swedish krona.
“The euro looks vulnerable,” he said in an interview on Wednesday. “There are many risk events in Europe. There is a lot of political risk.”
Political risk is the juggernaut that has unnerved the establishment this year and that promises to make life interesting well into 2017. Mainstream media and investors were shocked when Britain confounded pollsters by opting to leave the European Union. They were shocked again when a reality TV star became President-elect of the U.S. Now, with populist parties on the rise across Europe, Italy, the Netherlands, France and Germany could be next.
“The EU can easily end up with more countries leaving -- especially the Netherlands -- that could have a referendum after the election,” Mouland said. “Then it begins to unravel a bit. There’s a risk for that. If that happens, I think the euro can weaken quite a lot more.”
The fund, which uses derivatives to take fixed income and currency bets, has never had a negative return in a calendar year since it started investing nine years ago. The average annual return is 6.9 percent, with a 5.5 percent volatility.
Though the euro has already lost ground against the pound this month, “the reversal can go a bit more,” Mouland said. “The pound had taken too much of a beating. It’s not a one way street for the pound.”
The 43-year-old manager and his partner, Arne Loftingsmo, 45, have also placed bets on rising long rates in the U.S., based on an assumption that Trump’s fiscal policies will need to be financed by debt.
“We think the rate bottom is behind us,” Mouland said. “If he does what he said he’s going to do, there will be more government spending and tax cuts. We see a higher supply of treasuries. That’s why there will be a steeper yield curve.”
After years of central bank stimulus anchoring bond yields, the about-face triggered by Trump’s surprise win is proving something of a blessing for hedge fund managers, according to Mouland.
“It’s easier for us when there’s a lot of volatility,” he said. “At least for us it’s good. There will be more opportunities. Higher interest rates and more volatility. That’s fine for us.”