The Interview – Dietmar Schmitt, SAM Capital Partners: “It has taken time for investors to understand how a trading fund differs from more traditional long/short managers”
SAM Capital Partners is looking to expand the investor base of its SAM Capital Equity Opportunity Fund, launched in September 2007, on the back of a run of 13 successive months of positive return. Founder and chief investment officer Dietmar Schmitt says the firm’s approach is being validated by the plans of other groups to launch trading funds with short-term investment horizons.
GFM: What is the background to your company and fund?
DS: The SAM Capital Equity Opportunity Fund, launched in September 2007, is a transparent, focused and highly liquid European large-cap trading fund capable of taking both long and short positions based on short-term directional views. Positions within our portfolio are held anywhere from intra-day to 10 days and are based upon a limited universe of the top 300 to 400 largest, most liquid European large cap stocks. The fund typically trades between 20 and 50 of these names at any time in a book that is largely market neutral book. We actively trade around all positions and use index futures to implement or hedge directional changes and exposures and to enhance returns.
I am the founder and chief investment officer of SAM Capital Partners, and what we are doing here is what I have been doing my entire professional life: trading. I started my career in the 1980s at Dresdner Bank where I spent seven years in Frankfurt and New York. In 1990, I joined Morgan Stanley where I held various roles as a senior European equities trader in London and Frankfurt. In early 2001, I joined Cheyne Capital where I was a senior portfolio manager for more than six years. I had thought that one day I would set up my own fund, so I left Cheyne in May 2007 to do that.
We have an eight-strong team at SAM. In addition to myself, there are two other portfolio managers, Diego Tafi and Matthew Rowland, who both joined from Instinet. Diana Haroun, our operations manager, previously worked at Lansdowne, and Ghassan Bu-Chedid is our technical analyst. We also have chief operations officer Andrew Kennedy, who is responsible for business development, chief risk officer James Lewis, and chief financial officer and compliance officer Mark Steed.
GFM: Who are your key service providers?
DS: PNC is our administrator, and Morgan Stanley and Bank of America-Merrill Lynch are our prime brokers. We use Simmons & Simmons and Maples for legal services. Ernst & Young is the fund’s auditor and Kinetic Partners assist with onshore tax and audit needs.
GFM: Have there been any recent changes to the management team?
DS: The most recent management addition was the recent arrival of Andrew Kennedy, who was a senior member of the alternative investments group at Dresdner Kleinwort and also worked for a number of years at JP Morgan in London. I’ve known him for quite a while and was delighted when he agreed to join us. The rest of the team has been with me since our launch except Ghassan, who joined full-time about a year ago.
GFM: What is the profile of your client base?
DS: SAM was launched in September 2007, which in retrospect was a very tough time to launch a new fund. We raised about USD30m from friends and family on launch, and that money is still with us today. However, because of the difficulties in the markets and the tremendous challenges in raising money for hedge funds in 2008, we decided to put our heads down and focus on what we do best – generating investment returns. We only started actively marketing the fund in October when Andrew joined us, but so far the response has been very positive.
Our existing investors range include a fund of fund, private banks, a savings bank, a pension fund and a handful of high net worth individuals. We are currently in discussions with various family offices, private banks and fund of funds as well as a few pension funds, and we expect that mix to continue.
GFM: How would you assess the impact of the recent global financial crisis and economic downturn on your business?
DS: On a relative basis, we’ve done pretty well. In 2008, we were down about 5 per cent, which was the only down year in my career, but since November 2008 we have enjoyed 13 straight months of positive returns. We make money on both the long and short side, and given the highly liquid nature of our strategy and our ability to take advantage of quick, short-term directional moves, we think we are pretty well placed.
GFM: What is your investment process?
DS: We use a variety of quantitative and qualitative screens to identify investment opportunities. All the portfolio managers and Ghassan, our technical analyst, sit together so we are in constant dialogue every day about investment ideas and what is in the portfolio. We use a variety of criteria to initiate or exit trades. One of the key factors is to consider what positions are already in our book and how any new positions will fit. Although we are permitted up to 50 names in the portfolio at any time, we are typically closer to 20-35 positions. This allows us to remain completely focused on our positions at all times and monitor them on a live basis.
GFM: How do you generate ideas for your funds?
DS: As well as using a variety of technical tools to identify ideas, we are well covered by a number of the better brokers so, given our focus on hyper-liquid mega cap names in Europe, we are absolutely in the middle of the market flows. We follow broker upgrades and downgrades, sector reporting and rotations, news flow and a wide variety of other information. None of this necessarily means we will trade around these events or flows, but it is very helpful in constantly testing the market mood and direction.
We run a largely matched book at all times. We have discretion to take short-term directional moves but these rarely exceed 10 to 15 per cent net long or short.
Trade ideas are also driven by what is already in our portfolio. We always maintain a certain geographic and sectoral diversification, position size limits, gross and net exposures and so on to protect our downside risk. We may get strong signals on a particular day that we should go long financials, for example, but we would never take too much exposure to any particular sector. The question would then become which financials should we be long and what can we put on the other side of the trade. This is a dynamic process that we review every day.
GFM: What is your approach to managing risk?
DS: James Lewis, our risk officer, has been with us since launch. Our risk committee, which includes James, Andrew and myself, sets the portfolio limits and guidelines that are monitored daily. We have an e-mail alert system that sends out hard and soft trigger alerts to the risk committee any time a limit is breached, but since the system has been in place, the hard limits have never been breached and the soft limits almost never. If a limit is ever breached, James has full authority to step in and override the portfolio managers, but this has never happened.
One of the biggest risks any fund faces involves the ability to get out of a position if for some reason it is wrong. That’s why we run 100 per cent daily portfolio liquidity as one of our guidelines and only invests in large and mega-cap names. If we are wrong, we can go to cash either on a single name or on the entire portfolio within 5 to 10 minutes. This protects the downside risk for our investors.
All our portfolio guidelines as well as the weekly minutes of our risk committee meetings are available for review by the fund directors.
GFM: How has your recent performance compared with your expectations and track record?
DS: The fund had a good year in 2009. At the end of November, our euro class was up almost 29 per cent for the year, about 45 per cent for the previous 12 months and 21 per cent since launch; the dollar class was also up about 29 per cent for the year to date, 47 per cent for the previous 12 months and 24 per cent since launch.
Our goal is to make on average about 15 basis points each day. Obviously some days are better and some are worse, but if you exclude a handful of the very worst days in September and October 2008, we have largely done that since launch – not a bad result given what we have all lived through over the past two years.
In other words, we are pretty well in line with where we expect to be. We will never be the type of fund that tries to shoot the lights out, but we like to think we do a pretty good job at protecting our investors’ downside risk while generating attractive returns.
GFM: Do you expect your performance or style to change going forward?
DS: As a team we are very focused on our core competences and we don’t expect to change that in any material way. However, due to the nature of our trading strategy, we can make rapid changes in our risk tolerances depending on what we see in the market. For example, throughout much of 2009, we have gone to 40 to 60 per cent cash overnight since we think overnight risk doesn’t pay right now, and we have gone 100 per cent cash on seven or eight occasions this year to protect what we see as unnecessary market risk. Not a lot of other managers can say that. I don’t think our investors pay us to remain fully invested regardless of what we see in the markets, but to generate decent risk-adjusted returns. If we can’t do that, we don’t deserve to manage their money.
GFM: What events do you expect to see in your sector in the coming year?
DS: We have heard about a handful of other fund groups launching their own ‘trading’ funds, which is actually great news because it validates what we have been doing at SAM. Clearly investors like highly liquid, transparent and relatively straightforward strategies right now, and our active trading long/short style seems to be resonating well. It’s a good fit for Ucits products and very easy to accommodate within managed account platforms, so we expect other managers to develop new products in this area.
GFM: How do you assess investors’ current expectations?
DS: Our existing investors are quite pleased with how we have done and we are starting to generate quite a lot of interest from potential new investors. Our returns obviously help, but many investors are trying to identify more ‘traditional’ hedge fund managers – experienced managers who can demonstrate that they can generate absolute returns regardless of what is happening in the markets. There is also a tremendous focus on liquidity and transparency that works in our favour.
GFM: What differentiates you from other managers in your sector?
DS: We are doing something quite different from most other long/short managers. It has taken some time to help investors understand how a trading fund differs from a more traditional long/short manager. They generally have longer investment horizons, place more reliance on fundamental research, and try to identify companies that will either outperform or underperform. Many of these tend to be smaller and mid-cap names that are often hedged against larger indices. There are often liquidity traps for these managers if they need to rapidly exit for any reason.
We limit our universe to the largest and most liquid names and hold positions from anywhere as short as 10 to 15 minutes to 10 days on the longer side. We don’t need to hold our positions for weeks or months to know whether we are right or wrong – we know it within minutes, hours and days. Then we exit and find new opportunities. We take advantage of all sorts of news flow, market events and technical measures, but ultimately what SAM Capital offers is trader judgment. I have been doing this for 25 years and I have a fantastic, very experienced team here who do it with me every day.
GFM: How do you view the environment for fundraising over the coming 12 months?
DS: It should be very positive for long/short managers with good track records, transparent strategies, acceptable volatility and strong liquidity.
GFM: Do you have any firm plans for further product launches?
DS: None at this time, but we are continuing to follow closely the Ucits space, which may be a good fit for us.
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