The fund is advised by Blackhorse Research Pte Ltd, which
was established in Singapore in 2001 by John Engle. Together
with partners Jonathan Ross and Paul Rubens, the team has
a combined 35 years' experience in the Asian financial markets.
Engle is a CFA with 14 years of investment experience, much
of this with ABN AMRO HG Asia. He was most recently group
head of research for Asia Pacific and Latin America at Indosuez
W.I. Carr. Ross, also a CFA, has 11 years' experience in research
in Asia and was previously head of technology research in
Asia for Goldman Sachs. Rubens has 15 years' experience working
for leading investment management organisations in Hong Kong,
Taipei and Tokyo. He was most recently managing director,
Asia for Banc One Investment Advisors.
The fund has generated returns of -10.70% year-to-date and
12.65% since inception (May 2003).
Are there any plans to add to your investment team
in the next six months?
We are in the final stages of hiring our dealer, who we're
confident will add value on execution, managing our borrow
and in futures and options as we consider incorporating
these into our strategies. Having someone dedicated on
execution for both our long/short and absolute return
strategies should also free John and Jonathan up to spend
more time on research and portfolio management. Beyond
this we do not have any immediate hiring plans.
- Up to 60% of the portfolio can be in pair trades.
How is the pair trading book viewed strategically in the
overall portfolio and has it been successful in making money
and reducing the portfolio's volatility?
Historically, we have generated about 60% of our performance
from pair trading strategies implemented across Asia.
We look to pair trades primarily as a source of alpha
within our long/short mandate. Having said this, we also
like the idea from a risk perspective of making a larger
number of small bets on the individual security level,
where we feel our research gives us a higher probability
of success. For the most part, we feel more comfortable
with this risk as opposed to taking larger bets on particular
countries or sectors for example. Our pair trades have
been a consistent source of value added, even throughout
the difficult summer months.
Do you find enough stock borrow in markets outside
of Hong Kong and Singapore to effectively make pair trades?
Obtaining the borrow you want can be a challenge in Asia
ex-Japan, particularly in times of exceptional volatility
like we saw this past May and June. Of course, we would
benefit from more depth in the markets, especially for
smaller cap names, but there is certainly sufficient borrow
to implement our strategies, even as our assets have grown.
Boxing out desirable borrow has also been an effective
strategy for us.
- Have you found many opportunities since the fund's
launch for event- driven and arbitrage positions?
We have found some event-driven, which have accounted
for probably 10% of the total strategies we've put on.
We haven't focused much on arbitrage because we seek large
anomalies and that strategy doesn't really fit our experience
as research analysts. In event-driven, we look not only
at events directly affecting companies but also industry-wide
trends, such as identifying beneficiaries of regulatory
- What have been the greatest difficulties in running
a hedge fund from running long-only money?
You would think that as analysts, we know the good companies,
we know the bad companies, running a long/short sounds
pretty straightforward. In Asia ex-Japan though, we're
often faced with the decision of whether to take on a
trade by accepting a lower quality hedge or walk away
from an attractive long opportunity we've identified.
So in Asia long/short, you're not necessarily utilising
all of your research ideas because you can't short many
of the less attractive companies and sometimes you're
forced to walk away from long opportunities because you
can't find the other side of the pair. We also run a long-only
absolute return fund and there are challenges specific
to that strategy as well, but for the most part, implementing
your trading strategies is more straight-forward.
What are your current views of the less covered
markets in ASEAN like Indonesia and the Philippines?
Firstly, we like our vantage point in Singapore for covering
ASEAN. We get to Indonesia and the Philippines regularly.
The lack of research coverage over the past several years
also benefits us since we've continued to cover these
markets as analysts. Both Indonesia and the Philippines
are coming off some fairly deep troughs and we see the
valuations in areas like basic materials, shipping and
infrastructure to be very compelling. Here again though,
you have to structure your pairs carefully given the lack
of available borrow.
- The fund's performance was hurt by its technology
exposure over the summer; what have you learned from the
experience and have you made any tactical changes in your
We've learned quite a bit from our experiences in tech
this summer. We've realised the problems lower quality
hedges can cause you and also how very tight stop-losses
can at times prove counterproductive. In May and June,
we were taking our second or sometimes third choice of
short because of the unprecedented valuations we saw on
the long sidevaluations we hadn't seen in 15 years
of covering the space. Those hedges came back to hurt
us as we often found ourselves getting crowded out of
our shorts. On the long side, our small-cap bias in tech
also didn't help, as small caps significantly underperformed
large caps in our main tech market, Taiwan, this year.
The experience has certainly given us a new appreciation
of the effects of market-cap biases within pairs, the
importance of suitable borrow, having an appropriate stop-loss
level in place and value-added of futures and options
as a tool to effect hedges. Our decision to add a dealer
was largely driven by needs to do more in the last three
areas. We have also formally differentiated between strategic
and tactical allocation ranges for tech, as well as for
individual countries. The framework still enables us to
get aggressive should we have a strong view, but we now
recognise the increase in concentration risk as we move
above the strategic range into tactical.
- What current themes within technology do you now find
The previous tech cycle was relatively short and we
believe we are approaching a new trough, so valuations
across the sector remain very compelling on the long side.
The display space will continue to be a major theme within
tech. We are looking closely at a number of the components
makers, particularly those that excel in production process
- What are the current themes outside of the technology
sector that you are positioning the fund in the near term?
Where do you see the earning surprises for the third quarter?
Infrastructure is one, and of course, domestic demand
in the emerging Asian economies will continue apace with
the large emerging middle classes, particularly in China
and India. We think basic materials look good and we have
effected several pairs there and also see opportunities
in non-bank financial services.
- The US dollar has been significantly weaker in October;
how much of your performance gain this month has been due
to unhedged local currency positions? What is your view
on the dollar going forward and how will this affect your
Despite the move we've had, we're still cautious towards
the dollar vs. yen and most Asian currencies moving into
next year. We typically do not hedge local currency exposure,
so that has benefited us, but we do tend to move large
local currency cash balances back to dollars. For us this
month, while the local currency gains have contributed
to performance, the gains are modest compared to performance
of the underlying pairs. The dollar's direction will not
affect our strategy thoughwe'll continue to spend
the majority of our time focusing on identifying strong
companies in which to invest, finding appropriate hedges
and managing the risk
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