Post on 06-Aug-2015
MountjoyMountjoy CapitalCapital
Independent QualitativeIndependent QualitativeHedge Fund DiagnosticsHedge Fund Diagnostics
Rene LevesqueRene Levesquewww.mountjoycapital.comwww.mountjoycapital.com
Service OfferingService Offering
Ongoing HF research, screening and rankingOngoing HF research, screening and ranking
Specific searches & benchmarkingSpecific searches & benchmarking
Operational and investment due diligenceOperational and investment due diligence
HF portfolio selection & constructionHF portfolio selection & construction
Rene LevesqueRene Levesque
Proprietary equity derivatives trader, complianceProprietary equity derivatives trader, complianceofficer, middle office, risk manager and operationsofficer, middle office, risk manager and operations
Buy side and sell side experienceBuy side and sell side experience
Over 4300 hedge funds interviewed and evaluated sinceOver 4300 hedge funds interviewed and evaluated since2004 (over 2000 under the2004 (over 2000 under the MountjoyMountjoy Banner)Banner)
11--person HF research team at 2.4Bperson HF research team at 2.4B FoHFFoHF covering allcovering allstyles and geographiesstyles and geographies
Strategic interviewing training by former CIAStrategic interviewing training by former CIAoperativesoperatives
WARNING !!!WARNING !!!
Not all hedge fundsNot all hedge funds
deploy absolute return strategies.deploy absolute return strategies.
……and for as long as you (or your consultant) fails toand for as long as you (or your consultant) fails torecognize this, you shall continue to subsidize andrecognize this, you shall continue to subsidize and
provide a living to those who will ultimately fail youprovide a living to those who will ultimately fail youwhen a real hedge fund strategy is needed the most.when a real hedge fund strategy is needed the most.
False PerceptionsFalse Perceptions
NotNot Key Ingredients to Absolute Returns:Key Ingredients to Absolute Returns:
Long and short positions (Jones Model)Long and short positions (Jones Model)
Paired positionsPaired positions
Market neutralityMarket neutrality
Targeted volatility levelsTargeted volatility levels
Portfolio diversificationPortfolio diversification
……but perhaps key to reducing volatility of returns.but perhaps key to reducing volatility of returns.
False PerceptionsFalse Perceptions
NotNot Key Ingredients to Absolute Returns:Key Ingredients to Absolute Returns:
Deep due diligence orDeep due diligence or ““private equityprivate equity”” stylestyleresearchresearch
CatalystCatalyst--driven investingdriven investing
Buying on dips and selling on strengthBuying on dips and selling on strength
Distinguishing Alpha from BetaDistinguishing Alpha from Beta
……but perhaps key to outperform reference benchmark.but perhaps key to outperform reference benchmark.
Key To Absolute ReturnsKey To Absolute Returns
Dynamic allocation of risk to ideas currently receptiveDynamic allocation of risk to ideas currently receptiveto the marketto the market
Discipline in liquidating those that are no longerDiscipline in liquidating those that are no longerreceptive to the marketreceptive to the market
Portfolio construct:Portfolio construct:
NetNet: Aligned/biased to prevailing overall tend/sentiment: Aligned/biased to prevailing overall tend/sentiment
GrossGross: Sized to prevailing volatility regime: Sized to prevailing volatility regime
Sources & Origin of AbsoluteSources & Origin of AbsoluteReturn StrategiesReturn Strategies
Disintermediation from bankDisintermediation from bank’’s proprietary desks proprietary desk
Hedge Fund Manager = Analyst + PM + RM + Trader +Hedge Fund Manager = Analyst + PM + RM + Trader +Entrepreneur + Business ManagerEntrepreneur + Business Manager
““Back Down The New Haven LineBack Down The New Haven Line”” articlearticle
What is an Absolute Return Strategy?What is an Absolute Return Strategy?
MoreMore ““tradingtrading--orientedoriented”” than an investmentthan an investmentstrategystrategy
““The market is a collective perception of reality. It willThe market is a collective perception of reality. It willprove you right or wrong, not the truth !!prove you right or wrong, not the truth !!””
Trading = disciplined and dynamic calibration ofTrading = disciplined and dynamic calibration ofrisk exposuresrisk exposures
Key Elements of Absolute ReturnsKey Elements of Absolute Returns
LiquidityLiquidity
Effectively navigate between perception and realityEffectively navigate between perception and reality
Nimble/Trading styleNimble/Trading style
Disciplined & HumbleDisciplined & Humble
Portfolio Inclusion and SizingPortfolio Inclusion and Sizing
InvestmentInvestment
Index constituent & idea generationIndex constituent & idea generation
Valuation gap and convictionValuation gap and conviction
Absolute ReturnAbsolute Return
Idea generationIdea generation
Market receptivity/acknowledgmentMarket receptivity/acknowledgment
Loss tolerance/disciplineLoss tolerance/discipline
Portfolio ConstructionPortfolio Construction
InvestmentInvestment
Breadth of idea generationBreadth of idea generation
Underlying valuation gap and convictionUnderlying valuation gap and conviction
Investment policyInvestment policy
Absolute returnAbsolute return
Net: prevailing market direction and sentimentNet: prevailing market direction and sentiment
Gross: volatility regimeGross: volatility regime
Valuation Gap & ConvictionValuation Gap & Conviction
I like the stock at 100I like the stock at 100
I like it more at 90I like it more at 90
I love it at 80I love it at 80
II ““blowblow--upup”” at 40 !!!at 40 !!!
Best Strategies for Absolute ReturnBest Strategies for Absolute Return
Discretionary Global MacroDiscretionary Global Macro
Actively Traded Equity Long ShortActively Traded Equity Long Short
Systematic Global MacroSystematic Global Macro
Key Determinants (basic)Key Determinants (basic)
BackgroundBackground
AlignmentAlignment
ProcessProcess
Idea GenerationIdea Generation
InfrastructureInfrastructure
Pulse of Risk & Return DriversPulse of Risk & Return Drivers
Unique Features/Competitive AdvantagesUnique Features/Competitive Advantages
DisciplineDiscipline
Catalyst PushCatalyst Push
Market SentimentMarket Sentiment
Core + Opportunistic TradingCore + Opportunistic Trading
Dynamic Exposure CalibrationDynamic Exposure Calibration
Implied Strategy SkewImplied Strategy Skew
Liquidity, Liquidity, LiquidityLiquidity, Liquidity, Liquidity
Key Determinants (specific)Key Determinants (specific)