The Hedgeweek Interview: Andreas Tholstrup, Managing Partner, Farringdon Capital Management: "We focus on long-term value in companies, as opposed to short-term trading opportunities"
Farringdon Capital Management, founded in 2006 by Andreas Tholstrup and Bram Cornelisse, is an asset management firm specialising in fundamental long/short equity investing. In this interview, Tholstrup discusses the thinking behind the Farringdon Alpha One Fund.
HW: What is the background to your company?
AT: Bram Cornelisse, Dennis van Wees and I all worked at the equity research department of Merrill Lynch in London. In 2001, I moved back to Denmark and founded and co-managed the Carnegie Global Long Short Fund. In 2006 Bram and I decided to set up our own market neutral long/short equity fund called Farringdon Alpha One. Our performance (after fees) since our start in December 2006 has been +27% (+10% YTD) and AuM has grown from EUR30mn at inception to EUR155mn currently.
As for the strategy of the fund, we aim to achieve superior investment performance through fundamental research. Farringdon Alpha One is an equity market neutral long/short fund with a European focus, investing across a wide range of industries and market capitalisations.
Our goal is to achieve strong risk adjusted returns without large exposure to the overall stock market and without taking high volatility single factor risks. This means we believe it is possible to achieve good investment returns without taking large macro or sector bets. Our fundamental approach to stock selection should lead to alpha generation, which in turn should be the most important driver of the funds performance.
We do not think it is of value to our clients if we rely on excessive leverage and/or market exposure to try to generate performance. We focus on Alpha, not Beta. As a result we expect the fund's performance to show a low correlation to other asset classes. Since our inception our correlation has been negative.
HW: Who are your service providers?
AT: Our aim is to outsource as much of our administration as possible, in order that we can focus on what we do best; stock picking.
Our Administrator is Carnegie Fund Management, based in Luxembourg, Prime Broker, UBS London, Legal Advisors, Bonn Schmitt Steichen and Auditor, Deloitte SA.
As for our registration status, we are registered with: CSSF (Luxembourg) and ARIF (Switzerland)
HW: Have there been any recent events such as launches or changes/additions to the management team?
AT: No, we intend to remain a small, specialised firm, and do not intend to hire more staff
HW: How and where do you distribute the fund? What is the profile of your current and targeted client base?
AT: Farringdon Capital Management has done little formal marketing- about seven days in nearly two years. We have been more focused on using the seed capital that was invested and using this to create a diverse and dynamic portfolio. The fund has been listed on select web databases, but our most powerful marketing tool has been the strong network base that the fund managers have built up over the years. This network, combined with good performance, has meant that investors have, to a large extent, approached us. We are hoping to soft close by the end of the year.
For us, maintaining a diverse client base is important. Our investors consist of the following: Institutional clients (insurance/pension funds), fund of funds, family offices and high net wealth individuals from Western Europe and the States.
HW: What is the investment process of your fund?
AT: The investment process of the fund is to achieve superior returns by engaging in thorough fundamental analysis. Investment decisions are based on detailed proprietary models. We focus on long-term value in companies, as opposed to short-term trading opportunities.
Although we believe the market is fairly efficient, we continue to see stocks where the fundamental value deviates from the prevailing market price. This can be the case when:
• Accounting obscures the real value;
• The economics of a company are misunderstood, or in rare cases, a company is overlooked;
• The market is slow to recognise a change in the real world , or slow in correctly reflecting this change in the share price or;
• The market over-reacts to a certain news item.
We do not attempt to guess the direction of the stock market, currencies or the economy overall. Our performance should be generated through identifying incorrectly priced securities. However, we do believe that awareness of large macro trends is crucial for faster value realisation.
We do not try to sail against the wind of a large macro trend, and likewise where a large macro trend generates a tailwind we consider this in our investment decision.
HW: How do you generate ideas for your fund?
AT: Ideas are generated by all the portfolio managers based on their extensive reading and profound understanding of companies and their financials.
Ideas and ultimately, decisions about the portfolio are determined primarily by three factors: a) Valuation, b) Accounting, in-depth analysis of the financials, on and off balance sheet, vulnerability and efficiency) and c) Business model (thorough understanding what key parameters make or break the business, as well as understanding dynamics of the competitive landscape)
HW: What is your approach to managing risk?
AT: Risks are mapped out and assessed, but not necessarily hedged out. Value at risk and correlation matrices are reviewed, however the strength behind our risk management resides with the focused portfolio in which we have an in-depth knowledge of the companies.
We continually monitor the factor risks in the portfolio. i.e. are there structural differences between our long book and our short book. Our philosophy with respect to factor risks is similar to our philosophy to market and sector risks. We allow certain factor risks in the portfolio, (size, liquidity, valuation multiples, geographic, currency, and other discernible commonalities) but we do not accept certain factor risks to become dominant in the funds performance.
HW: Has your performance been as per budget and expectations? Do you expect your performance or style to change going forward?
AT: Performance style and risk parameters will stay the same going forward, as it has been since inception. As for exposure levels, we aim for: Net typical -30% to +30% Gross typical 140% to 180% Single positions typical 3-5% Sectors typical -10% to +10%.
It is very difficult to predict performance. We believe however, that if we have fully grasped the fundamentals of the portfolio stocks, then regardless of short term momentum driven fluctuations or changeable market conditions, we will continue to perform, long term, with the aim to generate mid-teen values, with a standard deviation of 7-12%.
HW: What opportunities are you looking at right now?
AT: We believe that potential opportunities arise when: accounting obscures the real value, consensus changes at a slower pace than real life and when companies are misunderstood.
As such, there in no particular theme or industry we are more focused on than others. But in general we will try to avoid industries or companies that we can't value or that have value drivers which are dependent on large unknown factors.
HW: What events do you expect to see in your sector in the year ahead?
AT: Going forward we believe that hedge fund investors will be more focused on 1) how performance of a hedge fund has been generated 2) how correlated a fund is to the overall stock market and 3) how transparent the fund is.
HW: How will these changes/future events impact on your own portfolio?
AT: Since our start, but also when I worked at Carnegie, we have been able to generate positive returns (15%+ on average) without taking any significant factor risks or market exposure. Looking at Farringdon in particular our return last year was +15.6% and this year we are up more than +10%. This has been achieved with volatility of about 8%, and a very low net exposure (gross 140%) and with correlation to the overall market that has been negative on a daily basis.
We believe we are also very transparent in our investment approach towards our investors. We normally discuss our investment cases in our monthly newsletters, provide daily NAV updates on our website and investors can even view our entire portfolio on request. Not many funds are willing to provide this insight and this combined with our focus on alpha generation is one of the reasons of our current and future success.
HW: What differentiates you from other managers in your sector?
AT: Our focus on portfolio construction and expertise on valuing individual companies is our key strength and we believe this will overtime lead to superior risk adjusted returns.
HW: Do you have any plans for other product launches in the near future?
AT: No, we want to stay a niche manager and focus on good risk adjusted return for our shareholders, rather than product growth and managing more people.
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