In the ever-evolving landscape of financial markets, where precision and foresight are paramount, exceptional fund managers stand out like beacons of financial acumen. It is hard for me to ignore the strong performance achievement of one of my partners whose expertise has not just navigated, but orchestrated, a symphony of success in the complex and dynamic world of investments.
Over the past five years, his performance has beaten a bull market in major stock markets, despite having no market beta, deriving no benefit from rising markets. In fact, the fund correlation to major stock markets has been negative, returning more than 100% (+109%) of its return in the 24 negative months (during which MSCI Europe fell 59%). I have just completed perusing the most recent report of his flagship fund which performed well in 2023 – again.
Here is a section:
During 2023 our average long position gave a ROIC of +12% (+11% total contribution to return with an average gross of 95%). Over the year, our average short position delivered a ROIC of +8% (+3.6% total contribution to return with an average gross of 45%).
Given the strong market return during the year we can conclude that although our longs contributed more to return, our long alpha was somewhat dull (-3%) (particularly in Europe) whilst our short alpha was exceptional (+24%), even if its contribution to return was more modest, leading to a very positive combined stock picking alpha (+20%).
The value of short selling is more easily identifiable in periods of market weakness. There were 5 negative market months in 2023 during which MSCI Europe delivered a negative return of 11%. In those same months the fund delivered a positive return of 24% (a negative downside capture ratio for the Fund relative to the market of -223%).
We believe that a hedge fund should offer not only compelling returns but returns which come at different times to commoditized market beta, which will always be more easily manufactured and can therefore be bought more cheaply through the passive fund management industry. We would also note that our return profile is truly unique and valuable as a diversifier, with no correlation to either equities, bonds, growth, or value.