The Hedgeweek Interview: Jason Gold, CEO and Portfolio Manager, Aurarian Capital Management: Focusing on stocks and not just on companies

Jason Gold describes Aurarian's investment strategy focused on unearthing and exploiting valuation inefficiencies in 'under the radar' US equities.

HW: What is the background to the fund?

JG: Aurarian Capital Management is a registered investment advisor.  It focuses on long/short diversified US equities and specializes in technology companies and companies that are affected by advancements in technology, including suppliers of medical, industrial, printing and defense equipment.

Aurarian has two funds managed by myself, these funds are:

  • Aurarian Capital Partners II, LP (3c7) - USD 29 million AUM, launched 10 February, 2004
  • Aurarian Offshore, Ltd. - USD 33 million AUM, launched 1 March, 2004

HW: Who are your service providers?

JG: We have five key service providers, namely:

  • Prime Broker: Banc of America
  • Administrator: Bisys RK Alternative Investment Services
  • Auditor: Deloitte & Touche
  • Legal Counsel: Seward & Kissell
  • Offshore Legal Counsel: Ogier

HW: How and where do you distribute the fund? What is the profile of your current and targeted client base?

JG: The funds are marketed to qualified institutional and high net worth investors. Our mix of clients is a blend of endowments, family offices, high net worth individuals, and funds of funds. We offer a domestic and offshore product.

HW: What is the investment process of your fund?

JG: Aurarian Capital is different.  We don't focus on the big stocks on which everyone else focuses.  We believe that these stocks are heavily influenced by program trading, geopolitical and macro factors because they are also part of various indices.

Aurarian maintains its research edge and generates superior absolute returns with low overall volatility by applying food-chain and channel-checking techniques to a more under-followed and less efficient arena - small-cap securities affected by new technologies.  By investing in long/short U.S. equities that are somewhat 'under the radar,' Aurarian exploits valuation inefficiencies, finding the low-hanging fruit and the unturned stones and where these 'juicy tidbits' make a difference to the performance of the stock.

We believe that small-cap securities present tremendous opportunities for absolute returns with low overall volatility based solely on underlying fundamentals.  Our bottom-up, company-specific and broad industry analysis and stock selection seeks to exploit valuation inefficiencies and leads to concentrated, event-driven opportunistic investing.

The Fund's 'sweet spot' lies in researching companies with market capitalizations of USD 100 million to USD 1.5 billion - where those investors who require meaningful liquidity are unable to make a substantial impact and the stock price movements depend far more on the fundamental results than upon a set of macro factors.  

HW: How do you generate ideas for your fund?

JG: Ideas are generated from a number of sources: senior management of companies; trade shows and conferences; Bloomberg, Baseline and industry screens; and key word extraction from company conference call transcripts.

We also use preliminary investment framework screens, through which we explore sub-sector-based themes, secular trend identification and readily identifiable catalysts, as well as fundamentally-driven systematic filters and proprietary company models.  Then we do channel checks to gain further insight.  These can include channel and company visits or calls, and investigating the company's competitors, distributors, vendors, suppliers, engineers, consultants, and customers.

Events such as earnings revisions, secular rotations or cyclical rotations can also be potential catalysts.

HW: What is your approach to managing risk?

JG: Aurarian maintains a strict risk control discipline and a balanced approach to the equity markets. Rather than make large directional bets, the Funds seek to generate alpha on both the long and short sides of the portfolio regardless of market direction.

We try to manage risk on both quantitative and qualitative levels.  Our sizing and stop/loss discipline applies to both longs and shorts equally.  After a position has moved 20% from the blended cost basis, the position is closed and trading in that security AND sub-sector is restricted for 30 days.  We utilize real-time risk reports; exposure reports by position size and sector weighting and size (beta-adjusted); total portfolio and sub-sector gross and net exposure; intra-day P&L by position; weekly liquidity analysis; and stress modeling to ensure the beta-adjusted risk matches the Funds' overall objectives.

In short, our investment priorities are to deliver consistent, outsized returns with low market correlation and minimal downside volatility; to protect capital from large losses; and to allocate capital dynamically to the most optimal risk/reward opportunities to create a flexible and diversified portfolio.

HW: How/against what do you benchmark the performance of your fund?

JG: The Russell 2000 Technology Index.

HW: Has your performance been as per budget and expectations? (If new launch, detail results of back-testing). Do you expect your performance or style to change going forward?

JG: We don't have a prescribed 'expected return' target.  We aim to deliver superior results regardless of the market's direction or point in the economic cycle.  Thus far, our returns have demonstrated that ability and particularly in times of market panic or uncertainty, we tend to excel.

Since we are a registered investment advisor, I am unable to comment specifically on the performance numbers of the fund, but they are available on several databases.

HW: What opportunities are you looking at right now?

JG: We are very excited about advancements that are being made in medical imaging - the ability to see into parts of the body using computers and advanced diagnostic software is remarkable and will create breakthroughs in early detection.

HW: What events do you expect to see in your sector in the year ahead?

JG: Hard to define our 'sector' per se…while we are encouraged by many of the things we're seeing, we have less unbridled optimism than we had a few months ago as stocks have begun to anticipate further good news.  We see this as a potential problem as the gap between expectations and reality is closing - thus potentially leading to less upside in many names.  Additionally, we are slowly seeing stocks begin to react negatively to bad news whereas for the first 3.5 months of the year, stocks generally brushed off this kind of news.

HW: How will these changes/future events impact on your own portfolio?

JG: We have reduced our net exposure over the past few weeks to protect against this.

HW: What differentiates you from other managers in your sector?

JG: It's hard for us to comment on other managers, but from my experience working at other funds, here is what I can say:

We use the research 'tools' learned over the course of our career and apply them to an area that other managers are generally overlooking. They overlook small caps because liquidity constraints prevent them from taking meaningful positions in them.  Because of the cost structures at many larger firms, they are required to put significant capital to work and are unable to do so in the small cap arena.  This creates an opportunity for us to exploit inefficiencies and to gain a research edge as our competition is less severe than it would be in the big cap arena.

Additionally, we differentiate ourselves from others by focusing on STOCKS and not just on COMPANIES.  Many managers are good 'company analysts.'  We however, see the difference between good stocks and good companies….sometimes good companies aren't good stocks and sometimes bad companies aren't bad stocks.  I realize the language here is subtle but the ability to spot the difference is critical - we get paid to pick good stocks not to pick good companies.

HW: Do you have any plans for similar/other product launches in the near future?

JG: Nothing is on the plate for the 'near' future.

(Jason Gold was interviewed on 25 April 2006)

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