Start-up hedge fund Ironhold scopes US-India dynamic with novel equity-currency approach

US/India flags

Launched earlier this year, New York-based Ironhold Capital’s equity-focused hedge fund is seeking to capitalise on opportunities in value-oriented stocks across the US and India.

Influenced by the investment styles of the likes of Joel Greenblatt, Warren Buffett and Ray Dalio, Ironhold combines elements of stock market value investing with currency hedging into one strategy, explains Siddarth Singhai, the firm’s chief investment officer.

Specifically, the strategy – co-founded by Singhai along with CEO Paul Gray - builds long-term bets on value names, with the portfolio split more or less evenly between US and Indian companies. At the same time, currency movements in the Indian rupee against the US dollar then leads the fund’s Indian exposures to serve essentially as portfolio hedges.

Singhai tells Hedgeweek that while the US dollar is perennially stable, serving as the world’s reserve currency and not subject to major devaluations or foreign debt moves, India’s economy remains heavily dependent on foreign investors.

“If they pull out their money, then all the business and spending they were financing in India dries up. This forces the government to either increase interest rates or print money, and what that does is devalues the Indian rupee more with respect to the US dollar in bad times. That’s where our hedge really comes in,” he continues.

The start-up manager eschews short selling of stocks because, according to Singhai, the practice typically tends to only work around 30 per cent of the time. Underlining this point, he highlights the torrid time bearish hedge funds have endured in recent times against a year-on-year stock market surge.

“On average, the stock market goes up seven years out of ten. The three years it doesn’t go up is where the hedges typically do make money,” he notes. “But even in those cases, we can only make 100 per cent which almost never happens because the stock market never really goes down to zero and it also introduces timing risk into the portfolio.”

Over the last decade, the traditional long/short approach has ultimately “played out pretty badly” for many US long/short hedge managers who have “chronically underperformed the indexes”, Singhai notes. “Your shorts may get killed, and in order to maintain those shorts you might have to liquidate your longs.”

He adds: “We are running a hedge fund, so we do have to provide some sort of a hedge. But our approach is a far better way to hedge the portfolio than going long/short and losing money 70 per cent of the time. None of the hedge fund managers who have been successful are really traditionally long/short. They are heavily weighted on the long side.”

Ironhold’s hypothesis was back-tested over some 25 years prior to launch earlier this year. Those back-tests saw the strategy generate alpha of almost 14 per cent. It compounded at 25.53 per cent, compared to the S&P 500’s 9.14 per cent, and the fund achieved those gains with low correlation and volatility, Singhai adds.

“The interesting thing was that both in the 2000 dotcom bubble and the Great Recession of 2008, we actually made a little bit of money largely because of the hedge.”

Before launching Ironhold, Gray had been a corporate credit administrator at Société Générale and product development analyst at Morgan Stanley, having previously worked in private equity for Broadway Stages Realty.  Singhai meanwhile was lead equity research analyst for Capital Ways Financial Advisors, focused on value investing in Indian markets.

Elaborating on the firm’s investment philosophy, Gray says “core quality businesses” are central to the firm’s focus.

“We’re not really focused on the macro picture,” adds Singhai. “The government is a tiny part of the economy, a fish in the ocean. The economy is its own beast. What we care about is the micro level. What is the management doing? Do they have a lot of debt? Who are their competitors?”

Looking ahead, Gray sees a “massive opportunity” in India for value investors, in stark contrast with the US where “everybody is looking at the same securities” – which makes it tough for investors to generate yield.

“Only about 3-4 per cent of the Indian population is invested in the Indian economy, specifically the stock market, at any given time. You can find securities trading far below their intrinsic value,” Gray says.

“A lot of the institutional investors see this and compare it to what China was 20 years ago. If you’re really looking to find alpha you have to do something different.”