Mon, 28/07/2008 - 07:00
Afsin Alp, a partner and portfolio manager with Meadowbrook Capital Management, says the Meadowbrook Beta Neutral Fund, which was officially launched to investors on July 1, has already demonstrated its uncorrelated performance characteristics by delivered its target return despite the recent turmoil in the markets.
HW: What is the background to your fund?
AA: The Meadowbrook Beta Neutral Fund was internally launched in October 2006 and was officially launched to investors on July 1 this year. It is a long/short all-cap fund employing a beta neutral strategy.
The principals of the fund are Michael Ragins and Evan Greenberg, while I am the portfolio manager, overseeing all investment decisions and acting as one of then firm's joint heads of research. The fund currently has USD10m in assets under management.
HW: Who are your service providers?
AA: Our accounting firm is RSM McGladrey, our legal counsel is Fox, Hefter, Swibel, Levin & Carroll, our fund administrator is Meadowbrook Capital Management Administration, and our prime broker is Banc of America Securities.
HW: Have there been any recent changes to the management team?
AA: In addition to launching the Meadowbrook Beta Neutral Fund to outside investors on July 1, in April this year I took over management of the Meadowbrook Opportunity Fund, a micro-cap fund employing a bottom-up strategy the firm launched in 2004.
HW: How and where do you distribute the fund? What is your current targeted client base?
AA: The Meadowbrook Beta Neutral Fund uses third-party marketers, databases and internal efforts to distribute the fund within the US. Our targeted investor base is mainly institutions and high-net worth individuals.
HW: What is your investment process?
AA: Our investment process starts with a quantitative model. It is a bottom-up strategy. After the modelling process, we do intensive fundamental and qualitative work before investing in any equities generated by the model.
We have different processes for our long and short portfolios. In our long investments, we look for high-margin businesses with incremental operating margins, and our main investment sectors are medical devices, health care, technology and software, although we also have some exposure to oil exploration and production and gold mining companies.
In our short portfolio, we invest in companies with deteriorating top-line revenue, commoditised products, falling return equities, increased competition and high valuation. We have a unique way of constructing our portfolio that starts with calculating a custom beta for each investment. After making a risk/reward analysis for each holding, we monitor the liquidity and determine the size of the position. Finally, we allocate our assets by neutralising the customised beta of each investment.
HW: How do you generate ideas for your fund?
AA: An idea is generated through our screens and detailed qualitative work is done on the name including channel checks and management team meetings. Also, technical analysis is used to pick an optimal level of entry point. The amount of the stock to buy or sell short is done after the beta of the stock is calculated and the risk/reward ratio is determined.
HW: What is your approach to managing risk?
AA: If a position in the fund trades two standard deviations lower than its cost, we review and/or exit the position. The fund also actively manages gross and net market exposure and hedges risk by using options. It also monitors its risk through proprietary spreadsheets with real-time P&L.
HW: Has your performance met expectations?
AA: The Meadowbrook Beta Neutral Fund's performance has surpassed our expectations. We outperformed the S&P 500 in 2007 by 18.9 per cent with a return of 22.4 per cent on the year. In 2008, the fund has outperformed the S&P 500 by 13.83 per cent, delivering a 1 per cent return for the year to date. Our target risk-adjusted return (Sharpe ratio) is 1.2 and we are planning to generate absolute returns of between 15 and 20 per cent a year.
HW: What effect do you expect external events to have on your fund's performance?
AA: Although we are not focused on one specific sector, the areas we invest in are uncorrelated with market events and their performance is related to company-specific progress.
Severe market events should not affect our portfolio's performance, as our beta neutral strategy allows us to minimise that market risk. This was demonstrated when the Meadowbrook Beta Neutral Fund was not impacted by the recent turmoil in the markets. Instead, the fund delivered its target returns by taking limited risk.
HW: What differentiates you from other managers in your sector?
AA: Our unique asset allocation model and our proven investment process differentiates us from other managers. Our fund will be an interesting product for institutions that are looking for uncorrelated returns in these volatile markets.
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