Norway is not what you would call a hotbed for hedge funds. Due to restrictive regulatory requirements and an almost uniformly long-only focused investor-community, there are only a handful of hedge funds managed out of Norway.
Despite this, Norwegian Warren Short Term Trading (WST) is one of the best performing hedge funds in the world. Since the fund’s inception in November 2011, its return has been 46.7% with a net 2012-return of 29.1% after fees (pdf).
WST hedge fund manager Peter Chester Warren explains how this works:
Our hypothesis is that most of what happens in the markets during a single day is noise created by orders, rumors and other temporary influences and that there is no informational value in this. Unlike our other funds, we do not try to separate the signal from the noise in WST but accept it for being just noise. … Time is instead spent on creating mathematical and statistical models meant to uncover short-term human behavior.
This is a significantly different strategy than that of most other hedge funds, which typically own assets over a period of time. WST rarely owns assets longer than a few minutes or sometimes even a few seconds.
And every day when the asset manager goes to sleep, he holds zero assets. Then, when he gets back in to the office the next day, he starts from scratch again, looking for tiny opportunities in the markets using a combination of correlations, math and experience.
If the fund was tracked by hedge fund-tracking firm SYZ—which most but not all funds are—it would have been the 10th best performing hedge fund in the world last year, according to a recent report. HSBC’s hedge fund tracking report yields a similar result. In non-hedge fund-speak, the fund is running on very low risk (the fund has a sharp ratio of 5.8 and an annualized standard deviation of 4.7%), but still providing excellent returns.
Life as a hedge fund manager is not what it once was. Back in the early ’90s, it was not uncommon to see funds with above 30% returns every year. People like George Soros and Julian Robertson offered mind-numbing returns, in some years around 100%.
Then the market got crowded. This year there are a little over 11,000 hedge funds, all chasing some version of the 11 different investing strategies (pdf). This has caused the average returns for hedge funds to drop. Last year the average hedge fund returned only 6.2%. That is down from almost 20% in the heyday 1990s.
“At the moment, the demand to become an investor in the fund is so great that we have had to soft-close it. The reason for this is that we are still figuring out what the capacity of our strategy is, so we are hurrying slowly,” Warren said.