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Interview with Blackhorse Asia Fund
Eurekahedge

November 2004

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).

  1. 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.

  2. 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.

  3. 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.

  4. 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 change.


  5. 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.

  6. 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.

  7. 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 portfolio management?

    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 side—valuations 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.

  8. What current themes within technology do you now find interesting?

    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 innovation.


  9. 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.

  10. 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 fund's positioning?

    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 though—we'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

Contact Details
Paul Rubens
+65 6327 4906
www.blackhorse.com.sg


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