José Luis Pérez, Cygnus Asset management

Cygnus Asset Management – Best Event Driven Multi-Strategy Manager

Download the special report Hedgeweek Global Awards 2014

The Europa Event Driven Fund is managed by José Luis Pérez. Pérez (pictured) aims to capture investment opportunities around corporate activity in Europe through inefficiencies and under or over-valuations relating to M&A, capital structure changes, spin-offs, regulatory changes, recapitalisations, restructurings and bankruptcies.

“The investment philosophy for the Europa fund is to generate performance for our clients while employing active risk management. In that sense, we like to invest in situations where there is asymmetry between significant upside and limited downside, or if there isn’t limited downside that there are ways to hedge away the tail risk,” explains Pérez.
 
Typically, the fund is long volatility and a net buyer of futures and options.
 
A rigid research methodology places special emphasis on changes in industry structures and supply trends to help identify potential special situations arising from legal and contractual conditions, re-ratings, etc.
 
With respect to idea generation, the fund uses a pool of around 15 ideas a month, within which between one and three positions are established.
 
“These 15 themes cover equities, credit and derivatives. We build the risk profile using a bottom-up approach. Each idea is typically expressed within the portfolio for nine to 12 months but we’ve had some trades that have been as short as a few days and as long as 18 months,” says Pérez. He notes that M&A activity is now starting to pick up in Europe but that the main theme last year was buying a variety of fixed income instruments in the European periphery; in particular Spain.
 
“It ties back to 2012, which was a very difficult year for European markets. When there is substantial capital dislocation a lot of ideas get left behind, from a risk/return perspective. We were able to identify several ideas and capitalise on them.
 
“For example, we took advantage of corporate preferred bonds and financial sector stocks in Spain. With respect to preferred bonds we found opportunities in a range of Spanish sectors including utilities, telecoms and energy,” explains Pérez.
 
The risk associated with each idea in the portfolio is assessed to determine how much it would cost to hedge. “We then look at the price of options, CDS, and if the price is low enough to compensate the risk that we’re taking then we’ll go ahead and hedge out that risk. We tend to have our ideas on the one side to generate the fund P&L, and a separate hedging portfolio that mitigates market shocks to that portfolio. The size of the hedging portfolio is a function of the risk we have on the book and of the hedging price.
 
“Currently, we are running a significant book and we have a significant portfolio of hedges.”
 
With corporate activity picking up across Europe Pérez says that the team has a good number of ideas in the pipeline: “We have been focused on the periphery of Europe for the last 18 months but we are looking at core Europe now as things appear to be settling down.”
 
Cygnus Asset Management was established in 2006 and currently manages approximately USD450m of assets. On winning the Hedgeweek award, Pérez comments: “We’re excited to receive this award and get recognition for the fund. We look forward to continue generating strong returns for our investors.” 

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