The Hedgeweek Interview: Focusing on the Canadian Story: Veronika Hirsch, portfolio manager of the BluMont Hirsch Long/Short Offshore Fund
Veronika Hirsch, Chief Investment Officer & Lead Portfolio Manager of Canada's BluMont Capital, outlines the firm's investment approach, products and strategy.
HW: What is the background to the firm and its principals?
VH: Founded in 2000, BluMont Capital is one of Canada's fastest-growing alternative investment firms with approximately CAD 700 million in assets under management and approximately 50 people employed across Canada. BluMont offers retail, institutional and offshore investors a wide range of hedge fund offerings ranging from single manager/open-ended funds to multi-strategy/multi-manager structured products with principal guarantees.
BluMont Capital Inc. is 46% owned by Toronto-based Integrated Asset Management Corp, a premier alternative asset manager with over CAD 2.8 billion in assets under management and commitments.
I am BluMont Capital's Chief Investment Officer & Lead Portfolio Manager. I have managed funds at Prudential (now Mackenzie), AGF and Fidelity in an investment career spanning over 25 years. While with AGF and Prudential, funds under my management were top quartile performers. I hold a BComm degree from McGill University in Montreal and I am a frequent guest and commentator on financial matters in the Canadian media.
HW: Do you currently have any joint ventures?
VH: No, however, BluMont Capital has a strategic alliance with Man Investments under which BluMont acts as a Canadian distributor of bank-issued notes linked to various Man investment vehicles.
In Canada, BluMont also has two multi-manager funds that combine the managerial talents of Veronika Hirsch with those of other top-tier Canadian hedge fund managers.
HW: What is your current AUM and what are your products/strategies? How much is under management in each fund and when were these funds launched?
VH: As at May 31, 2005, BluMont Capital currently has approximately CAD 700 million in assets under management. The AUM per fund is as follows:
- BluMont Hirsch Long/Short Fund CAD 36.4 Million (launched August 2002)
- BluMont Hirsch Long/Short Offshore Fund CAD 1.6 million (launched February 2005)
- BluMont Hirsch Performance Fund CAD 128.5 million (launched September, 1997)
- BluMont Market Neutral Fund CAD 23 million (launched April 12, 2002)
- BluMont Canadian Opportunities Fund CAD 53 million (launched January, 2001)
- BluMont Strategic Partners Hedge Fund CAD 47.1 million (launched May, 2002)
- BluMont Man Multi-Strategy Fund CAD 6.5 million (launched March, 2005)
BluMont Man Multi-Strategy Note Products CAD 380 million in all Man-linked notes (a new series of notes is launched every 6 months approximately)
We also act as an adviser on 2 mutual funds which have an aggregate of CAD 25.8 million in assets.
HW: How and where do you distribute your hedge funds? What is your current and targeted client base?
VH: Domestically (i.e., throughout Canada) the majority of our investment products are targeted to retail investment advisors who then place these products with their respective clients. In addition, we are also developing an institutional and offshore clientele. As it is generally considered that the Canadian hedge fund industry is several years behind its American counterpart with respect to the widespread acceptance of this asset class by institutions, we expect to see significant growth in this sector over the next several years.
With respect to our recently launched BluMont Hirsch Long/Short Offshore Fund, we are marketing it to the international investment community, both internally and through our prime broker, Scotia Capital. We are also considering employing the services of a third-party marketer. Offshore, we have received interest from fund of hedge funds, family offices, high-net worth individuals and institutions. Indeed, the so-called "Canadian Story" is currently of interest to international investors for three principal reasons:
First, international investors have been reconsidering their level of U.S. exposure in light of recent U.S. macroeconomic trends and have looked to Canada as a good source of non-U.S. diversification. As we frequently like to point out, many investors believe they have "North American" exposure when they merely have "U.S" exposure.
Second, many investors are beginning to see investing in Canada as a great way to take advantage of growing Asian demand for commodities without having to invest in the less-developed Asian capital markets. Given the Canadian market's large commodity exposure, investing in a Canadian fund allows international investors to get exposure to the world's great commodity producing companies while at the same time, taking advantage of the more stable, well-regulated nature of the Canadian capital markets.
Lastly, as hedge funds have helped purge some of the inefficiencies from American and European capital markets, investors are looking for new market inefficiencies to exploit. It is a fact that Canadian markets are not as efficient as their U.S. and European counterparts due to lesser liquidity and less depth of analyst coverage. This should provide investors with opportunities that are not currently available in U.S. or European markets. In contrast to other less developed yet similarly "inefficient" capital markets, however, Canadian securities markets are very well regulated.
HW: How do you generate ideas for your funds?
VH: We take a mosaic approach with respect to idea generation. A substantial amount of our investment research is generated internally. A typical day involves conducting a significant amount of research, meeting and talking to company management teams and industry analysts, and evaluating company financial statements and related corporate disclosure documents. We have many industry contacts across various sectors of the Canadian economy and are continually evaluating and responding to information that we receive.
We also maintain good relations with the Canadian analyst community which provides us with additional ideas and research. Indeed, we maintain particularly good relations with analysts at the mid-market and "boutique" firms. These brokerage firms tend to give us access to "under-covered" companies and as a consequence, we get to invest in many opportunities before they receive widespread analyst coverage by some of the larger bank-owned firms. Because of this, we have frequently been able to invest in fast-growing companies at very reasonable prices.
HW: What is your approach to managing risk?
VH: The BluMont Hirsch Long/Short Offshore Fund incorporates several risk management methods with its long short strategies:
Short selling is used to lower market exposure, in some cases through pair trades that are used to lower sector/industry volatility. Option strategies are also used to lock in profits and to mitigate market risk. Cash is also employed as a tool to lower market exposure.
Another key element in our risk management process is diversification. The Fund's Long/Short strategy typically has 80 to 90 positions spread across several sectors. Because of this conscious diversification, no single investment has been responsible for a majority of the strategy's returns or losses in any calendar year.
A key criterion for determining which individual securities to buy is liquidity. All stock positions are subject to minimum liquidity screens and the strategy does not invest in private companies.
Leverage is also restricted and is not usually relied upon to magnify returns. Although the maximum permitted leverage is 200% of the Fund's NAV, very limited leverage has been used historically.
Trading activity is also subject to continuous monitoring: significant losses on individual short or long positions warrant immediate attention and overall risk budgeting and exposure levels as well as portfolio allocation is reviewed weekly by the CEO and senior management. Furthermore, trades are reviewed by BluMont's compliance department and are reviewed for consistency with BluMont's Trade Allocation Policy.
HW: What is the investment process of your hedge fund/s?
VH: 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 primarily invests for growth, but growth at reasonable price.
The long/short strategy employed by the Fund uses a 3-stage investment process consisting of the following steps:
1. Theme/Sector/Industry Analysis. At this initial "macro" stage, we determine what the dominant industries and sectors will be for the foreseeable future. This analysis is responsible for selecting what sectors and industries will comprise the portfolio's "core holdings", which account for 60-75% of the overall portfolio allocation. By contrast, the remaining 25-40% of the portfolio allocation is based more on event-driven factors, permitting us to take advantage of non-thematic, opportunistic events. In addition, the respective weightings between the core and event-driven parts of the portfolio are continually monitored and re-balanced to take advantage of prevailing market conditions. For example, at certain times the market may experience a so-called "flight to quality"- where the stocks of larger, more established companies are favoured - while at other times it may experience a "beta run" where more speculative stocks are in vogue. The portfolio's allocation between the core and event-driven sectors will be different depending on such external factors as these.
2. Stock Selection Process. Having established those sectors and industries where we see significant opportunities, we then proceed to employ a bottom-up, research-intensive approach. As we tend to be qualitative investors, the chief criterion that will "short-list" a company at this stage is the strength of a company's management team although other factors are taken into account such as the strength of a company's balance sheet. Prior to an investment being made, this qualitative analysis is compared against various quantitative and technical screens.
3. Investment Decision. Provided a stock meets the above-mentioned qualitative and quantitative tests, we then make our investment decision. Core long positions feature 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 exhibiting the reverse of these characteristics. We then employ technical analysis to support our investment thesis and to look for the ideal entry points with respect to individual stocks. For example, if we believe that we have uncovered a really great company whose stock is at a historical high, we will hold off investing in this stock until we find a better entry point. Most initial investment allocations are around the 1-2% level but are increased if we gain confidence in our initial investment decision. Most holdings do not comprise more than 5% of the total portfolio.
HW: How is your portfolio allocated? (Detail major portfolio allocations in % terms).
VH: As of May 31, 2005, allocations to the long/short strategy employed by the Fund were as follows (as a percentage of Net Asset Value):
HW: What is the performance/track record of your fund? Do you expect this to change going forward?
VH: As the BluMont Hirsch Long/Short Offshore Fund has only been in existence since February 1, 2005, it would be more relevant to look at the returns of the Hirsch Long/Short strategy, which has been run in Canada since January 2001. As at May 31, 2005, the Hirsch Long/Short Strategy had an annualized return of 15.7%. Although we are looking for a more muted investment climate for the next few years, we still see some substantial opportunities occurring in specific sectors.
HW: What sectors are you looking at right now?
VH: We are still bullish on energy although there is some negative seasonality at places in this sector, as all resource stocks tend to perform poorly going into the summer months. In anticipation of this seasonality, we have taken some profits. We see this seasonal turbulence as a great source of opportunities to accumulate quality stocks.
HW: Do you expect any style shift in your funds going forward?
VH: Absent any drastic changes in the market - which would force us to re-evaluate our allocation between the core and event-driven segments of the portfolio - we do not, at present, anticipate any significant shift in the foreseeable future. This could change, however, based on a variety of external factors.
HW: What events do you expect to see in your sector in the year ahead?
VH: We don't see any material changes to the Canadian long/short sector as a whole. It is important to note that because each individual long/short manager is different, it is difficult to comment on the overall sector from a risk and return perspective. Moreover, our style is flexible and has the ability to dynamically adapt to any unforeseen sector changes as it has done in the past.
HW: What differentiates you from other managers in your sector?
VH: Due to the structure of the Canadian economy, we believe resource expertise differentiates Canadian managers from each other. The resource sector is a difficult sector in which to consistently produce alpha and it takes experience through several economic and market cycles to master the sector. Since our management team has, collectively, over 30 years investment experience in the Canadian market, we believe that we have a great advantage over many newer, less experienced managers.
In addition and to repeat what we previously mentioned, we pride ourselves in having particularly good relations with the analysts at the mid-market and boutique brokerage firms throughout Canada and these firms give us access to companies that tend to be under-followed with respect to analyst coverage. Because we get to see many of these types of companies before they receive widespread analyst coverage - and consequently increase in price - we can generate first-mover advantages.
HW: Do you have any plans for product launches in the near future?
VH: Since most Canadian-only funds have limited scalability due to the smaller size of the Canadian equity market in comparison to its American counterpart, the BluMont Hirsch Long/Short Strategy will be capped at approx CAD 300 million, which means that there is only about CAD 215 million left that we can allocate. Therefore, all our efforts in the offshore area will be devoted this fund over the next 12 months.
Looking forward, if the BluMont Hirsch Long/Short Offshore Fund meets with the success that we anticipate, we have plans to take other funds of ours - and perhaps other Canadian managers - offshore.
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