Interview: Robert Romero, Connective Capital Management: "Growing opportunities for alpha generation on both long and short sides"

Interview: Robert Romero, Connective Capital Management: "Growing opportunities for alpha generation on both long and short sides"

Mon, 15/12/2008 - 07:37

Connective Capital Management portfolio manager Robert Romero says the Silicon Valley-based firm, which specialises in investing in the technology and alternative energy markets, has identified profitable short opportunities in consumer hardware and semiconductors and long opportunities in areas such as emerging energy infrastructure.

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

RR: We expect to see some bankruptcies in the technology and emerging energy sectors as some weaker companies fail to raise the necessary capital during the current credit crunch.

HW: What is the background to your company and funds?

RR: Connective Capital Management was founded in November 2003 and has approximately USD123m in assets under management as of December 1. Our team and myself have a proven track record of generating positive alpha returns on both the long and short sides of our trades.

The team currently manages three strategies, Connective Capital I, a long-short market neutral fund, Connective Capital II, a 100 per cent net beta short-biased fund, and Connective Capital Emerging Energy, a 50 per cent net beta long-biased fund.

HW: Who are your service providers?

RR: Our law firm is Sadis and Goldberg and our accountants are Harb, Levy, & Weiland. Yulish & Associates is administrator to our US-based onshore funds, while Kaufman Rossin Fund Services administers our Cayman-based offshore funds.

HW: Have there been any recent events such as changes to the management team?

RR: Traders Justin Lent and Ying Qian left the firm and Ivan Tsurikov replaced them as the trader. Analyst Jeff Lipton has left the firm and we are expecting to replace him in the first quarter of 2009.

HW: What is the profile of your investor base?

RR: Our fund ownership currently consists of 8.29 per cent employees, 0.74 per cent a family office, 86.86 per cent funds of funds and 4.11 per cent high net worth individuals. We are actively looking to attract new investors across the entire spectrum.

HW: What is the investment process of your fund?

RR: Investment ideas are sourced from the extensive contact base of the investment team, derived from their combined more than 30 years of experience in the technology sector. The investment team members have extensive personal contacts with financial, technological and operational personnel in the technology and alternative energy markets. The research team's due diligence into target sub-sectors among technology companies provides the flow of investment ideas.

Given the significant number of new companies and existing names in the technology and emerging energy sectors, there are many opportunities to profit on both the long and short sides of the portfolio. There is a great deal of hype, promotion and momentum in the technology and emerging energy sectors, but only a few companies emerge as dominant players in their respective space.

Many companies eventually fail and are phased out, creating an abundance of ideas on the short side. Connective Capital Management attempts to exploit these opportunities on the short side while trying to identify the few winners in each sub-sector.

Then we attempt to reduce the volatility inherent in the technology and emerging energy markets by constructing a relatively balanced portfolio so that stock selection is the main driver of alpha and not prediction of market direction.

Investments are selected on the basis of expected risk-adjusted return. Returns may take time to be achieved, so Connective Capital Management attempts to hedge its market exposure so that the portfolio from stock selection has a medium- to long-term investment horizon.

HW: What is your approach to managing risk?

RR: Our firm manages risk based on an information-based stop-loss strategy.

HW: What opportunities are you looking at right now?

RR: As hysteria changes to measured caution, we see growing opportunities for alpha generation on both the long and short side. Now that virtually every equity's valuation includes an estimate of performance under a recessionary scenario, we are seeing a return to multiple differentiations based on actual company fundamentals. We have identified profitable short opportunities in consumer hardware and semiconductors. Long opportunities include emerging energy infrastructure.

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

RR: We expect to see some bankruptcies in the technology and emerging energy sectors as some weaker companies fail to raise the necessary capital during the current credit crunch.

HW: How will these developments impact on your own portfolio?

RR: To stay on top of these tumultuous market dynamics we strive to utilise our core strengths in fundamental research to general alpha. As fear wanes, we expect to see increasing opportunities and hope to generate even stronger performance than was possible under market panic. We remain focused on aligning our fundamental insights with macro factors such as Obama's plans for economic recovery and an unrelenting credit crunch.

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

RR: Connective Capital Management is based in Silicon Valley, in the heart of the technology and emerging energy sectors, with great personal access to the portfolio companies. More than 50 per cent of the portfolio is less than 50 miles away.

Given the investment team's experience and personal relationships with more than 350 industry executives, engineers, scientists, and customers, it has significant information flow. The firm is also different from other managers because it generates a significant amount of alpha in the portfolio from the long and short side and does not maintain the typical long bias in the portfolio that some other managers might do.

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

RR: Due to strong performance of our CCII QP short fund and the strong relative performance of our CCI Master Fund long/short market neutral fund, numerous investors have expressed interest in making an initial allocation or increasing their current allocations. If the demand is there we will launch a CCII Master Fund.

However, we are also experiencing redemptions through no fault of our own and expect that it will remain a difficult fund-raising environment in the foreseeable future.


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