“Hedge funds are back”: Veteran investor Dixon Boardman sees “compelling opportunities” across three key strategy areas
Seasoned hedge fund investor Dixon Boardman (pictured), the founder and CEO of New York-based multi-manager group Optima Asset Management, is bullish on hedge funds for the year ahead – seeing compelling opportunities across several strategies after a year in which strong outperformance by many hedge funds has put alternatives firmly back on the radar of allocators around the world.
Boardman, who has more than 30 years’ experience in hedge fund investing experience and is also vice chairman of Forbes Family Trust, highlights three key areas of opportunities that stood out last year and which he sees as continuing to offer ‘significant opportunity’ in 2021: Asia, especially China and India; healthcare; and concentrated ‘best ideas’ stock-picking by top long/short equity managers.
“These were not ‘flashes in the pan’,” says Boardman. “Rather, they stand to benefit from very strong secular trends that have ‘legs’.”
Looking back on 2020, he notes: “This was a historic year of extraordinary social and economic developments stemming from the coronavirus, including a breathtakingly sudden plunge in equity and credit markets, followed by an historically quick rebound.”
While many investors were dazzled by the performance of leading growth stocks such as Facebook, Amazon and Tesla, Boardman points out that 2020 was also a year of remarkable outperformance by long/short equity hedge funds that were positioned to capitalise on trends and dislocations.
“This is especially striking, given that many investors had become disenchanted with hedge funds during the late stage of the bull market preceding 2020,” he comments.
Regarding Asia, Boardman notes that the MSCI Emerging Markets Asia Index was up 28% in US dollar terms. “That was a very good year for the region’s markets,” he says. “But Optima is taking the long view. Our strong conviction is that we are entering the ‘Age of Asia’. In particular, China and India stand out as the most significant and fast-growing emerging markets not only in the region but the world.”
In his view, key segments of the economies of these countries – especially tech and retail – are undergoing rapid transformation. To play this opportunity, Optima relies on a long/short manager with long experience in the region and a deep understanding of the secular growth trends. “We believe that this is an ideal way to participate in the Age of Asia,” Boardman adds. “Because there will be ‘winners’ and ‘losers’ along the way, a long/short approach to equities has the potential to add value and take advantage of short-term volatility.”
As for healthcare, the S&P 500 Health Care Index was up 13.5% and the NASDAQ Biotech Index was up 26% in 2020. While the recent returns are impressive, Optima is again looking to the long term. “The investment opportunities in healthcare and biotechnology are especially exciting due to long-term growth trends which are less sensitive to general economic conditions,” Boardman states. “In particular, the sector is being driven by new drug discoveries and treatments, not only for Covid-19 but in other areas such as gene therapy, immuno-oncology, and orphan drugs.”
Boardman says Optima is also taking a global view of the sector. “Aside from being a large and dynamic segment of developed economies, the healthcare sector is an important area of growth in emerging markets, where the demand for services and treatments is expanding rapidly,” he says. Furthermore, even after the sharp rise in healthcare stocks last year, he believes that significant segments of the sector remain below historic valuations.
As with the “Age of Asia” theme, Optima is relying on a seasoned long/short equity manager in the healthcare space who takes an opportunistic investment approach. “You really need strong scientific and business expertise to invest successfully in healthcare,” explains Boardman. “We therefore favour a strategy that combines insights into industry trends with intensive bottom-up, fundamental stock analysis and medical knowledge.”
On the long side, Boardman believes there are companies poised to generate superior growth from new product approvals, positive regulatory developments, significant mergers or partnerships, or favorable market dynamics. On the short side, he sees opportunities to target vulnerable companies that are under pressure from intensifying competition, lack of innovation, or failed products.
In addition to these specific regional and sector themes, Boardman is also focused on long/short equity hedge funds that have demonstrated an exceptional ability over the years to pick stocks – believing that these types of managers can add value by concentrating on their “best ideas”.
Backed by three decades of experience in identifying, evaluating, and selecting outstanding hedge funds, Optima is looking for managers that meet demanding quantitative and qualitative criteria, and which have a performance record driven by superior stock selection.
While the overall theme is “concentrated stock picking”, the firm’s approach includes a mix of investment styles, including growth, value, opportunistic, and event driven. “Our strong belief is that the environment remains highly favourable for managers with superior stock selection capabilities, and who concentrate on high conviction, research-driven investment ideas,” says Boardman.
A pioneer in the field of hedge fund investing, Boardman launched the well-regarded Optima Group – which manages multi-manager, single manager, and customised hedge fund programmes for institutions, family offices, and high net worth individuals – back in 1988.
Thirty years on, the firm was acquired in 2019 by FWM Holdings – the parent of Forbes Family Trust, the global multi-family office group that originally managed the wealth of the Forbes family before expanding to other family offices and wealth groups. Today the combined entities manage over $11 billion.
“The bottom line is that hedge funds are back,” says Boardman. “However, this is not a ‘do-it-yourself’ hobby. Successful investing in alternatives requires experience and insight. And Optima is committed to honing its skills in this area every day.”