Fri, 12/01/2007 - 09:16
Principal Tim Seymour outlines the investment thinking and processes that are driving Red Star's performance in Russia and Eastern Europe.
HW: What is the background to your company and fund?
TS: Red Star Asset Management and Red Star Double Alpha Fund SPC were launched in June 2005 by principals Tim McCarthy, James Fenkner and myself. All three founding partners worked together for more than seven years at the largest asset manager and investment bank in Russia.
The Red Star Double Alpha Fund is an absolute return objective focused on Eastern Europe and Russia, targeting returns of between 18 and 20 per cent and half the volatility of the region's markets (less than 14 per cent). The fund, which had assets under management of USD126m as of December 15, is managed by all three partners on the investment committee.
HW: Who are your service providers?
TS: Our auditor is Ernst and Young, our lawyers are Akin Gump and Walkers, our administrator is UBS Dublin, and our prime brokers are UBS and CSFB.
HW: How and where do you distribute the funds? What is the profile of your current and targeted client base?
TS: The fund is a Cayman SPC and offered to non-US investors or accredited US investors using PFIC accounting. Our current investor base is an even mix of private banks, emerging markets funds of funds, pension funds and high net worth investors. We target investors looking for preservation of capital and low-volatility exposure to Eastern Europe and Russia.
HW: What is the investment process of your funds?
TS: We take a bottom-up discounted cash flow risk-adjusted approach to valuing companies. The fund contains a long-only, value-driven core portfolio, and a market neutral, relative value satellite portfolio. There is an active asset allocation process between core and satellite.
HW: How do you generate ideas for your funds?
TS: Five analysts on the ground in Moscow, along with the three partners, look at companies in the region across sector-specific lines. Models are constantly updated to identify relative value, arbitrage restructuring event opportunities.
HW: What is your approach to managing risk?
TS: Both systemic and portfolio risks are constantly evaluated via specific position limits and overall diversification of the portfolio away from the weightings of the regional benchmark indices.
HW: Has your performance been as per budget and expectations? Do you expect your performance or style to change going forward?
TS: Over the 19 months since inception the fund has far exceeded targeted return of 18 to 20 per cent, delivering 49 per cent, while at 10.7 per cent its volatility has beaten its objective less than 14 per cent. The fund's style and strategy remain the same. Continued market volatility and inefficiency continue to support a market neutral, relative value approach to investing in the region, as opposed to long only.
HW: What opportunities are you looking at right now?
TS: We are looking at spread differentials between sector peers on valuation and price, and restructuring of fundamental industries in Russia producing value and offering opportunities to play sum-of-the-parts valuation arbitrage.
HW: What events do you expect to see in your sector in the year ahead?
TS: We see continued re-rating of Russian industrial assets, and continued re-rating of the local currency and those businesses that have exposure to rouble-based revenues. We believe consumer and domestic plays will outperform.
HW: How will these changes/future events impact on your own portfolio?
TS: We expect continued exposure away from commodity plays and into those domestic stories offering tremendous organic growth and consumer exposure.
HW: What differentiates you from other managers in your sector?
TS: Red Star operates the only true hedge fund strategy specialising in the region. The fund's net exposure from inception has averaged close to 40 per cent and the ability to short stocks and execute on market neutral strategies sets the fund apart.
HW: Do you have any plans for similar product launches in the near future?
TS: Red Star Asset Management will launch a small cap product focused on the region in 2007.
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