Toronto-based BluMont Capital is one of the fastest-growing alternative investment firms in Canada and is home to Veronika Hirsch, one of Canada's leading hedge fund managers.
In Canada, BluMont offers a wide range of funds, from single manager/open-ended products to multi-strategy/multi-manager structured products with principal guarantees. For international investors, BluMont has just launched an offshore version of its successful long/short fund. The fund duplicates a strategy that has been in existence since January 2001 and as of 28 February 2005 had an annualised return of 18.7% and an annualised volatility of 9.9%.
1. What is your style of alternative investing?
Variable bias long/short Canadian equity hedge (mostly large-cap/mid-cap combination).
2. Can you discuss the strategy of the BluMont Hirsch Long/Short Offshore Fund?
The fund's objective is to strive to deliver consistently positive returns each year, independent of the performance of the S&P/Toronto Stock Exchange (TSX) Index by investing primarily in securities issued by Canadian corporations and mitigating the overall risk of the portfolio through various hedging strategies.
The fund's investment approach follows a three-stage process:
Step one consists of Theme/Sector/Industry Analysis. This is a "macro" stage where we search for what we believe will be the dominant industries and sectors. This "macro" analysis is typically responsible for the sectoral allocation of the portfolio's core holdings, which comprise 60-75% of the portfolio. (The remaining 25-40% of the portfolio is based on more event-driven factors and allows us to take advantage of non-thematic, opportunistic events.)
Step two consists of the Stock Selection Process where, within those sectors and industries where we see significant opportunities (as determined above), we employ a bottom-up, research-intensive and predominantly qualitative approach to stock selection. The chief criterion here is the strength of a company's management. This analysis is compared against technical and quantitative screens prior to an investment being made. We invest for growth, but growth at reasonable price.
Step three consists of the actual Investment Decision. Core long positions are selected from those companies with proven management teams, strong financial positions, well-defined growth strategies, competitive advantages and pricing power. Core short positions, by contrast, are chosen from companies suffering declining business prospects, weak financials and poor management track records. Our price of entry is guided historically and in comparison with an individual stock's peers. Initial positions are targeted around the 1-2% level and are increased if confidence is gained in the initial investment decision. Most holdings comprise no more than 5% of the total portfolio.
3. What financial objectives do you aim to achieve with the recently launched offshore version of the BluMont Hirsch Long/Short Fund and is this the same strategy as the domestic fund?
The objective of the domestic and offshore long/short funds is the same. The BluMont Hirsch Long/Short Offshore Fund tracks the strategy of the successful BluMont Hirsch Long/Short Fund which has a very successful track record, having been in existence since January 2001 and having over C$82 million in assets under management as of March 2005.
The offshore fund has been launched because of increased demand by international investors for a Canadian "play." We have found that there are three predominant reasons why foreign investors would want to look at investing with a successful Canadian manager:
First, there is an increased desire on the part of the international investment community for non-US diversification. In fact, many investors believe they have "North American" exposure when they really only have "US" exposure. Such exposure is being reconsidered in light of recent US macroeconomic trends.
Second, international investors wish to take advantage of commodity market movements. Given: (i) recent trends in world commodity prices; and (ii) the fact that the Canadian economy and currency tend to be linked to commodity prices, buying Canadian equities provides international investors with an opportunity to take advantage of increased Asian demand for commodities without having to invest in these much riskier economies.
Third, Canadian markets are not (yet) as efficient as their US and European counterparts. This structural inefficiency provides investors with opportunities that are not currently available in the US or European markets. However, while Canadian securities markets may not be as efficient, they are still very well regulated.
4. You are not interested in large caps, why is that so?
It is not that we are not interested in large caps but we tend to focus on growth, which tends to be found in the small- to mid-cap sector.
5. Pairs trading - do you do that for all the BluMont funds you manage?
Yes, whenever possible, although this is not always possible due to the lack of depth in the Canadian market in some industries. For example, in the technology sector, we may have to short a US stock. In some other industries, we would have just a long position or a naked short.
6. What is BluMont's relationship with Integrated Asset Management Corp?
BluMont Capital Inc is 46.1% owned by Toronto-based Integrated Asset Management Corp, a premier alternative asset manager with over C$2.6 billion in assets under management and commitments. Top officers of Integrated Asset Management Corp sit on the board of directors of BluMont and also fill the roles of CFO and Controller.
7. How are you treating the subject of risk measures with the newly launched offshore fund?
Risk is monitored, mitigated and controlled in various ways.
Diversification is key. The fund has typically 80 to 90 positions and the portfolio is diversified across several industries, sectors and securities. As the fund invests in many securities, no single investment has been responsible for a majority of returns in any calendar year.
Short selling is used to lower market exposure. Pair trades are used to lower sector/industry volatility and option strategies are used to mitigate market risk and to lock in profits. The fund uses cash as a tool to lower exposure on a seasonal basis.
With respect to leverage, the maximum leverage allowed is 200% of the fund's NAV. Historically, however, very limited leverage has been used. The Fund does not rely on leverage to increase returns.
Liquidity is also a key criterion when we look to buy individual securities. The fund does not invest in private companies and all stock positions are subject to minimum liquidity screens.
The fund is also subject to continuous monitoring: significant losses on individual (short or long) positions warrant immediate attention and overall risk budget and exposure levels as well as portfolio allocation is reviewed weekly by the CEO and senior management. Furthermore, all trades are logged by BluMont's compliance department and are reviewed to determine if they are consistent with BluMont Capital's Trade Allocation Policy.
8. What investments/sectors have worked well and which have not in 2004?
Overall, we believe that those sectors that worked well in 2004 are poised to work well in 2005. First and foremost is the energy sector: given oil price forecasts, we expect this sector to remain strong for the foreseeable future. We do not favour the financial sector in our portfolio, as robust earnings growth in this sector is not anticipated. In materials, we expect continued performance from some of the large, commodity-based names. Steel stocks performed well in 2004 but we think that this over-performance is now over and have taken profits. The Canadian telecom market has undergone rationalisation over the last while and is now subject to more rational pricing; although telecom is currently a small part of our portfolio, it is responsible for a good part of its positive returns and we expect this sector to do well.
9. Are you developing an appetite for Asian equities market?
For the most part, we will not invest in non-Canadian stocks; however as per the above, we invest in Canadian resources/energy companies in order to indirectly benefit from the large Asian appetite for the products of these companies. Indeed, we believe this is a great way to take advantage of Asian demand while at the same time, taking advantage of the more stable, well-regulated nature of Canadian capital markets.
10. BluMont recently announced it will close the BluMont Hirsch Performance Fund to new investors in either early March 2005 or upon reaching $150 million in AUM. Are you structuring any new product offerings in the pipeline?
For the international audience who will be reading this, the most important news item is that on 1 February 2005, BluMont launched the BluMont Hirsch Long/Short Offshore Fund. There has been significant interest in this fund but international investors must remember that given the smaller size of the Canadian stock market, capacity will be reached much sooner than for an equivalent US or European long/short fund.
11. From the first two months of 2005, which sectors do you think will be ahead of the pack for the rest of the year?
Most notably, the energy sector. Given oil price forecasts, we expect this sector to remain strong.
12. What are some of the current views on hedge funds in Canadian equity market?
We are not bullish at the moment, with the exception of energy stocks which are somewhat of a double edged sword - although these particular stocks may outperform the market, higher energy costs are passed on, which tends to depress earnings in other sectors. Given the current economic environment of rising interest rates and energy prices plus somewhat sluggish earnings growth, it is difficult to be bullish on equity markets over the short term.
Sales and Marketing Manager, Institutional and Offshore
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