Interview with Mark Tredgett, Managing Director of Jemekk Capital Management Inc
Jemekk Capital Management is an employee-owned alternative asset manager headquartered in Toronto, Canada. Jemekk has two full-time portfolio managers dedicated to the company’s single investment product, the Jemekk Long/Short Fund. The fund is focused on a single investment objective – protecting and growing investor capital. Jemekk’s portfolio managers utilise a number of strategies which in combination are intended to generate consistent, superior and risk-adjusted returns.
Since inception, the fund has accomplished its stated investment objective. The Jemekk Long/Short Fund has generated a 31% compounded annual return over 2.5 years, and its annualised standard deviation is tracking at 9.0%. In 2006, the fund is up 41% (YTD), and importantly, Jemekk has accomplished the performance with below-market volatility.
The guiding principles of Jemekk Capital Management and the Jemekk Long/Short Fund can be summarised as follows:
Performance: The Jemekk Long/Short Fund is up 41% YTD (2006) and has generated a 31% compounded annual return since its inception in Jul 2004.
Comparative Performance: Since inception, the fund has exceeded the S&P 500 by 60%, and the Canadian benchmark index by 35% (S&P/TSX).
Below-market Volatility: The fund has outperformed the S&P/TSX by 35%, accomplishing the feat with below-market volatility of 9.0%.
Demonstrating Downside Protection: The fund has generated a negative return in only four months since inception. The benchmark Canadian index (S&P/TSX) has produced a negative return in ten months over the same period.
Partner Commitment: Jemekk’s partners are fully invested in the fund and represent the single largest investor by a wide margin.
Assets Size: Jemekk manages CAD55 million and is committed to closing the fund at CAD150 million. The managers wish to remain nimble and performance focused.
Small- and Mid-cap Focused: Jemekk’s core competency lies in identifying investment opportunities in small- and mid-cap Canada, an inefficient segment of the North American equity market.
Large Target Market: Canada’s small- and mid-cap market has approximately 1,000 companies (sub CAD1.0 billion market cap). This marketplace offers meaningful opportunities for Jemekk to capitalise upon.
Bottom-up Investment Process: Jemekk’s portfolio managers are bottom-up investors. Identifying and researching single-stock investment opportunities also form another one of the firm’s core competencies.
Event-Focused: Investments that qualify for the portfolio typically have an identified event or catalyst. Historically, the fund has averaged 60 to 80 positions, including longs and shorts.
Limited Leverage and Exposure: The use of leverage is modest and has averaged 1.3 times since the fund’s inception in Jul 2004. Additionally, Jemekk’s managers use stock-specific and sector shorts (ETFs, indexes) to maintain a balanced, hedged portfolio. Since inception, the fund has averaged a net long bias of 30%, and by mandate, cannot exceed 60% (net exposure/invested assets).
Market Generalists: The Jemekk Long/Short Fund is a generalist fund, with capital deployed (long and short) into all sub-sectors of the Canadian market. We do not manage a commodity- or energy-focused hedge fund.
Eurekahedge: Your investment mandate indicates that the fund is multi-strategy; however, the product is titled Jemekk Long/Short Fund. Do you consider the fund to be long/short equity or multi-strategy?
Jemekk: A good question. The fund’s strategies are unchanged since inception in Jul 2004; however, whether we are long/short equity or multi-strategy seems to be a matter of investor opinion. As managers, we consider ourselves ‘opportunity agnostic’, and accordingly, the strategies used in the fund tend to cross the basic lines of traditional long/short hedged equity. At any point in time, the fund is typically involved in the following strategies: relative value (paired investments), event-driven longs and shorts, merger arbitrage, warrant arbitrage, directional or sector bias, convertible arbitrage, and un-hedged longs and shorts. The vast majority of these strategies are achieved through long and short positions in common equity; however, some investors consider Jemekk more multi-strategy in orientation. We like to think of the fund as multi-strategy inside the confines of long/short hedge. This may sound a bit confusing, but importantly, not to us as managers.
Eurekahedge: Would you contend that, from an investor’s standpoint, a Canadian multi-strategy fund is a better proposition than a long/short fund targeting similar opportunities? If so, why?
Jemekk: Again, another good question. We would argue that a multi-strategy mandate provides us with more flexibility as managers – which equates to more potential opportunities for the fund. For example, the ability to deploy capital to warrant arbitrage or merger arbitrage situations – when we perceive a favourable risk/reward – can prove additive to the overall performance of the fund. Again, we strive to be ‘opportunity agnostic’ as managers, and a multi-disciplined approach to Canada’s small- and mid-cap market has proven effective over the past two and a half years.
Eurekahedge: It appears the fund is centred on four primary ’investment pillars’. What is the breakdown of the fund’s allocations across these strategies?
Jemekk: The fund’s four pillars or strategies are segmented as follows: 1) relative value (paired investments); 2) directional or sector bias; 3) outright longs and shorts; and 4) opportunistic investments. Historically, strategies 1 to 3 have comprised close to 95% of the portfolio, while opportunistic investments have been relatively small – at 5.0% of gross capital deployed. Regarding allocations: historically, capital has been divided evenly among the first three strategies – give or take 5% to 10% of gross capital deployed.
Eurekahedge: How does Jemekk manage these different strategies – and does this present a challenge in terms of the asset allocation? How frequently are these allocations revised?
Jemekk: Allocations to Jemekk’s three primary strategies or pillars is done on an opportunity-specific basis. As bottom-up managers, once we identify an opportunity which holds merit, either long or short, we allocate this idea according to where the investment best fits into Jemekk’s overall portfolio positioning. For example, if we identify a good short candidate, but are unable to identify an appropriate off-setting long to hedge this exposure and create a paired position, the short opportunity would likely be added to the portfolio as an un-hedged short in pillar #3 – or potentially in pillar #2, where we hedge sectors on a dollar-neutral basis. Importantly, we would only add an un-hedged short position in pillar #3 if we were sufficiently comfortable with the portfolio’s overall net exposure. Allocations to the four strategies are monitored weekly by Jemekk’s two portfolio managers.
Eurekahedge: Do you foresee any significant shift in your sector exposure in the near term? Why or why not? What are the typical holding period of an investment and the turnover of the portfolio?
Jemekk: As bottom-up managers, we do not subscribe to the theory of sector rotation and/or sector timing. Expressed in another way, any future shift in Jemekk’s sector exposure will be determined by the firm’s fundamental research conducted on a bottom-up basis. Regarding holding periods, we have some positions in the portfolio today which were added when the fund launched in Jul 2004. Other positions, providing they meet our investment criteria, are added (or shorted) on an ’as identified‘ basis. Small- and mid-cap Canada is inherently volatile, and accordingly, we aim to reduce this volatility by restricting position sizes and maintaining 60 to 80 positions. The fund’s turnover tends to run between 100% and 130% annually.
Eurekahedge: The Canadian market contains a variety of idiosyncratic features, such as commodity bias and (despite proximity to the US market) different levels of liquidity and capacity. What are your thoughts on these and other qualities specific to the Canadian market?
Jemekk: Yes – we totally agree. The Canadian market is idiosyncratic in many ways, and relative to other markets, Canada has a higher percentage of commodity-based companies. As managers, we view the unique characteristics of the Canadian market as an opportunity for Jemekk. For example, some of the distinct characteristics of the Canadian market include the following: the prevalence of bought deals, a high percentage of facilitation capital in institutional trading (bank and broker capital), the prevalence of equity warrants, and multi-tiered corporate shareholder structures (eg multi-vote vs single-vote equity). In aggregate, the above characteristics amplify the importance of ‘local knowledge’ when investing in Canada – which we would argue creates a premium for experienced managers with a demonstrated ability to navigate and monetise these market nuances.
Regarding liquidity and capacity constraints, you could not be more correct. Liquidity often presents a problem in Canada – especially in specific segments of the market. The secret of dealing with this market characteristic is restricting asset size in order to stay nimble. There are a number of good Canadian hedge fund managers who have become prisoners of their own success – and make the mistake of over-sizing their asset base. This is why Jemekk is committed to closing the Jemekk Long/Short Fund to new assets at (or below) CAD150 million. In order to continue our successful performance record, capping the fund will be a necessity.
Eurekehedge: For the most part, US hedge funds have attracted the bulk of the institutional money in North America. Does this represent a challenge for marketing a non-US fund? What are the advantages and disadvantages from your point of view in terms of investor preference?
Jemekk: You are 100% correct – the vast majority of institutional assets are invested with US single-manager hedge funds. A small handful of Canadian managers have enjoyed some success attracting non-Canadian institutional investors, but domestic Canadian institutions remain relative laggards when it comes to embracing alternative managers. Whether this will change looking forward remains a subject of debate among Canada’s hedge fund community.
Regarding investor preference, one of the disadvantages Canadian hedge funds present to institutions is the lack of capacity – especially when compared with the capacity available at many US hedge fund managers. Jemekk is a good example of this potential challenge. For example, when a fund is designed to be ‘capped’ at CAD150 million in assets, many large institutions cannot secure the capacity required to make the allocation additive.
As it stands today, the institutional investors interested in Jemekk are not the larger institutions looking to deploy CAD50 million and above, but rather performance seekers who are happy making CAD3.0 million to CAD10.0 million investments into unique, niche funds with a demonstrated track record. To date, most of the genuine interest we’ve received has come from smaller fund of funds and multi-family offices (MFOs), typically with a bias towards ’off the beaten path’ single managers. Additionally, the fact that Jemekk’s partners have 100% of their personal capital invested in the fund is important to this constituency of investors.
Eurekahedge: From a regulatory angle, what is the current regime in Canada and is this changing investor appetite (institutional and/or retail)?
Jemekk: Some alternative managers in Canada are registered with the Ontario Securities Commission (OSC). Jemekk, for example, is registered with the OSC as an Investment Council and Portfolio Manager (ICPM), and also as a Limited Market Dealer (LMD). As a hedge manager, we welcome regulation in Canada’s alternative investment market because this should help education and acceptance from institutional and retail investors alike. The OSC is showing good leadership by requiring registration. From our perspective, Canada in general suffers from a meaningful lack of understanding about alternative investment vehicles – and the value that uncorrelated return products can bring to a portfolio. We suspect regulation can lead to broader acceptance of the asset class – but to date, Canada remains a comparative laggard in this regard.
Eurekahedge: Your fund has outperformed the Eurekahedge North American Hedge Fund Index since inception. Would you consider this a valid benchmark, or how would you prefer to compare your active management against?
Jemekk: As managers, we do not make investment decisions with a benchmark in mind. Because we are Canadian managers, most investors compare our returns to the S&P/TSX Composite index, which is the widely-accepted equity benchmark in Canada. We are comfortable being compared to any North American or Canadian index (passive or hedge), but whether these are appropriate comparisons – we will let investors make this determination. Regardless of the index an investor uses when evaluating Jemekk, our only request is that investors look beyond our return profile and consider the fund’s volatility (or lack thereof). It is always nice to tell investors returns are exceeding the domestic index by a wide margin; however, we are equally proud the fund’s volatility is tracking below the S&P/TSX index at 9.0%
Eurekahedge: Could you share with us your outlook for Canada in the near and medium term?
Jemekk: As managers, we are bottom-up investors. We consider our target market of 1,000 Canadian small and mid-cap companies to be an inefficient segment of the North American equity market. Simply explained, we are cautiously optimistic our investment process in finding exciting opportunities will continue. Regarding the Canadian market directly, although we are not thematic or top-down investors, we do not subscribe to the widely-accepted view that today’s commodity bull market represents ‘a new paradigm’. When people start talking about ‘this time it’s different’ – history has proven it is usually a good time to proceed with caution! This is why the Jemekk Long/Short Fund is a generalist fund – and also why we maintain a genuinely hedged portfolio at all times.