As manager of Cheyne Capital’s Thematic Long/Short Fund, Richard Woolf (pictured) brings what he describes as a “healthy dose of scepticism” to his portfolio management style and trading approach.
As manager of Cheyne Capital’s Thematic Long/Short Fund, Richard Woolf (pictured) brings what he describes as a “healthy dose of scepticism” to his portfolio management style and trading approach.
His contrarian perspective on markets is underpinned by a broader mix of ideas influenced by technological disruption, societal changes, and economic dislocations arising from the ongoing coronavirus pandemic.
By capitalising on mis-pricings across European mid-cap stocks using a broader thematic trading style, the veteran manager has scored exceptional double-digit returns for the long-running strategy in 2020, with the unprecedented economic upheaval of the past six months proving to be fertile hunting ground for the fund.
“The most enjoyable part of the job is the intellectual challenge of trying to figure out where the world is heading before the rest of the market does,” Woolf explains of his broader investment philosophy.
After starting his career on the trading floor at Goldman Sachs in London, Woolf later became co-head of the bank’s European emerging market fixed income and currency desk.
Having cut his teeth as a trader during the Russian debt crisis, Woolf quickly learned that consensus thinking around markets can fall apart. That experience ultimately instilled in him a contrarian approach to investing, which continues to inform much of his portfolio management style to this day.
“Managing a fund requires you to constantly find pockets of the market that others are not assessing correctly,” he observes. “As a result, my style is somewhat contrarian and comes with a healthy dose of scepticism.”
In 2003 Woolf joined Cheyne Capital, the London-based credit and multi-strategy alternative investment manager established in 2000 by former Morgan Stanley traders Stuart Fiertz and Jonathan Lourie.
Here he launched a long/short equity strategy that implemented macro views through equities. Strong performance led Woolf to strike out on his own in 2009, launching Elsworthy Capital along with Marc Mazur, former head of Brevan Howard Asset Management’s US operations.
Yet the stringent regulatory environment in the immediate aftermath of the global financial crisis ultimately proved “prohibitively burdensome”, Woolf recalls, with administrative tasks distracting from his central focus of portfolio management. Having remained close to Cheyne’s management team, he later re-joined the firm in 2013.
“The state-of-the-art institutional infrastructure would allow me to focus purely on managing money and I spent the next two years fine-tuning what is now the Thematic Long/Short strategy,” he says of his second stint at Cheyne.
Compelling opportunities
The Cheyne Thematic Long/Short Equity Fund trades European mid-cap stocks using a combination of robust, deep-dive fundamental stock analysis and active trading with broader thematic research.
It aims to identify and capitalise on wider investment themes that are misunderstood by the market in the short term, which can often lead to pricing anomalies – and trading opportunities – within the underlying stocks.
“The market consistently under-appreciates the impact of thematic changes, which leads to the mis-pricing of securities most affected by them,” Woolf says of the fund’s thematic element.
Specifically, it seeks out trading ideas emerging from certain economies, sectors, industries and companies undergoing unprecedented changes – such as a global pandemic, the shift from bricks-and-mortar retail to e-commerce, or the transition from internal combustion engine cars to electric vehicles, to name just a few.
Woolf believes such changes can offer “compelling” long and short opportunities, as the market “does not have a historical reference point on which to anchor its expectations.”
This forms the basis for the investment portfolio, which is built around 10-15 uncorrelated investment theses, each of which is implemented through between two and four equity ideas.
“As a starting framework, we focus on a handful of broad trends that are still in their early innings but which we think are irreversible and will provide incredible opportunities for the next decade on both the long and the short side,” he explains.
“We then dig deeper into more defined, actionable themes that capture the investable winners and losers of the broader categories.”
Repositioning the portfolio
The fund officially launched in November 2019, but the strategy has been running under the broader Cheyne equity umbrella for some 18 years, during which it has delivered an annualised net return of 11.8 per cent, maintaining positive performance throughout the 2008 global financial crisis and 2011 European debt crisis.
More recently, it has generated a year-to-date net performance of almost 19 per cent in the first six months of 2020, with a monthly June return of 5.1 per cent.
That followed sustained positive performance between March and May, just as many other hedge fund strategies fell by the wayside during the Covid-19 market sell-off.
“As a thematic fund we are constantly looking for structural or macro disruptions that the market fails to price correctly,” Woolf says of the firm’s initial response to the growing coronavirus crisis.
“We were closely monitoring the virus news from China in January, and as the headlines from Lombardy started becoming more and more alarming in early February, we repositioned our entire portfolio.”
Specifically, the fund cut its cyclically-exposed and travel-related positions, and started building short positions in airlines, bus companies, shopping mall REITs, event planning and ticketing businesses, and cinema operators.
“On the long side we also invested in hospitals, online pharmacies and food delivery platforms and increased the size of our e-commerce holdings,” he continues.
“As the market collapsed, we opportunistically started deploying money into high quality national champions that fell victim to indiscriminate selling and select Covid-exposed businesses that had strong balance sheets and a runway to withstand even a 12-month full lockdown.”
Bringing the story back up to the present, Woolf outlines how the strategy’s recent gains have been powered by three broad defining themes arising from the pandemic and subsequent lockdown.
The first theme zeroed in on how the nascent recovery in travel and retail would play out. After modelling a particularly harsh structural mid-term stress-test across the airline, airport and travel agent sectors, the fund identified “compelling opportunities” in the industry, even under negative scenarios.
“We were early to capture the rebound in European low-cost carriers and have been disciplined in taking profits as the margin of safety became less attractive after a strong rally.”
The second theme involves long exposures to certain e-commerce companies which will continue to thrive beyond the Covid-19 crisis. The trade is supported by specific structural themes including digital transformation in emerging markets, the growing share of the luxury market now moving online, and software businesses that enable these transitions.
Thirdly, the fund has been constructing short bets against several work-from-home beneficiaries which are now trading on aggressive future expectations, which Woolf believes are unlikely to be met.
“By actively trading around positions, we can capitalise on dislocations and generate returns regardless of the broader market or economic environment, particularly during heightened volatility,” he says of recent ideas.
Continuous innovation
Looking ahead, Woolf is also closely monitoring the ways in which companies are planning to transition from temporary state support back into a still-fragile economy, with ideas emerging around certain “zombie companies” – for instance, some state-owned airlines – that are yet to restructure operations to make them more competitive in the future.
“There is continuous innovation and disruption that makes this job uniquely exciting and keeps you on your toes,” he says, looking ahead to opportunities further down the line.
“We think a lot about technology adoption curves and changing consumer habits, but ideas will also often come from simple observations.
“When you start seeing a handful of people in the office using wireless headphones and raving about them, and that number doubles in a month, it’s time to look at the entire value chain and identify any potential investment opportunities.”
He continues: “E-commerce penetration is only five to 25 per cent depending on which part of the world you look at. The transition to the cloud is still at a very early stage. Electric vehicles still only represent a minuscule share of the total sales, and the majority of takeaway food orders are still placed over the phone, just to name a few obvious trends and transitions that we think will continue to accelerate.”
