Dreman Value Management LLC opens offshore hedge fund
Dreman Value Management has opened the High Opportunity Hedge Fund, an offshore fund that will be managed by Dreman alongside its onshore fund.
The onshore fund was launched in September 2003 and has a two-year track record.
Through his research foundation, Dreman Foundation, Inc, Dreman founder David Dreman has accumulated over 30 years of research comparing low P/E stocks versus high P/E stocks and has applied his research and investment philosophy successfully for 30+ years in the mutual fund industry.
Ten years ago, he began to note in his research the applicability of his investment philosophy to short positions in high P/E stocks. In October of 2003, he seeded his first quantitative hedge fund to test the long/short hedge fund strategy using the proprietary model he had devised using his years of research and investment experience.
Dreman has consistently applied a contrarian value approach to investing by utilizing, as part of his research methodology for building a value portfolio, the same quantitative screening methodology that has been adopted for this fund. This quantitative investment process, utilized by the fund manager since 1977, involves the application of various value screens including low P/E, low price-to-cash flow, low price-to-book value, and high yield (low price-to-dividend) to a universe of stocks. The fund manager then applies his judgment to add further screens for both long and short portfolio candidates.
The fund portfolio strategy was back-tested from 1970 to 2004 and the academic back-tested model returned 16.9 per cent gross of fees annually over that period. An USD 1 million investment at the beginning of 1970 would have grown to over USD 163 million in low P/E stocks, compared to USD 41.90 million for the S&P 500. Due to compounding, the proposed hedge fund strategy would have been extremely profitable over time, yielding total returns after the fourth quarter of 2004 that exceed the S&P 500 by more than a factor of 5.
To improve on the back-tested model, the manager incorporates a momentum model to enhance performance and a volatility model to dampen volatility for this fund. The momentum model replaces the simple strategy of buying S&P index futures in the back-tested model and is designed to reduce the negative impact of an increase in the market value of the shorts on the return on the portfolio. The volatility model is designed to not only reduce the volatility of the portfolio in periods of increasing market volatility but to also improve its performance in such periods. Both models are based on proprietary analysis perfected over years of investment experience.
"This fund will provide us with an opportunity to employ for a hedge fund vehicle our Contrarian/Value strategy that we have developed and refined over a 25-year period of active investment management," explains Dreman. "On the long side, our approach will be to emphasize stocks that offer unique investment values while an analogous screening process is used for identifying potential short sale candidates. We offer investors a disciplined approach, and a perceptiveness that has been sharpened by years of experience."
Since its inception in October, 2003 through the third quarter of 2005 the fund has returned 28.6 per cent versus the S&P return of 27.8 per cent. Having established a two-year track record, the fund is now open to investors and will soft close at USD 1 billion.
Background notes: Dreman Value Management, LLC has over USD 13.7 billion in assets under management as of September 2005. Dreman is the sole manager of the Scudder-Dreman High Return Portfolio, a mutual fund with assets over USD 6 billion, rated by Lipper as the Number One fund among equity income funds with a 15 year performance and by Morningstar as the Number One fund among large cap value funds with a 15 year record.
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