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Toronto-based BluMont Capital
is one of the fastest-growing alternative investment
firms in Canada and is home to Veronika Hirsch,
one of Canada's leading hedge fund managers.
In Canada, BluMont offers a wide
range of funds, from single manager/open-ended
products to multi-strategy/multi-manager structured
products with principal guarantees. For international
investors, BluMont has just launched an offshore
version of its successful long/short fund. The
fund duplicates a strategy that has been in existence
since January 2001 and as of 28 February 2005
had an annualised return of 18.7% and an annualised
volatility of 9.9%.
1. What is your style of alternative investing?
Variable bias long/short Canadian
equity hedge (mostly large-cap/mid-cap combination).
2. Can you discuss the strategy of
the BluMont Hirsch Long/Short Offshore Fund?
The fund's objective is to strive
to deliver consistently positive returns each
year, independent of the performance of the S&P/Toronto
Stock Exchange (TSX) Index by investing primarily
in securities issued by Canadian corporations
and mitigating the overall risk of the portfolio
through various hedging strategies.
The fund's investment approach
follows a three-stage process:
Step one consists of Theme/Sector/Industry
Analysis. This is a "macro" stage where
we search for what we believe will be the dominant
industries and sectors. This "macro"
analysis is typically responsible for the sectoral
allocation of the portfolio's core holdings, which
comprise 60-75% of the portfolio. (The remaining
25-40% of the portfolio is based on more event-driven
factors and allows us to take advantage of non-thematic,
opportunistic events.)
Step two consists of the Stock
Selection Process where, within those sectors
and industries where we see significant opportunities
(as determined above), we employ a bottom-up,
research-intensive and predominantly qualitative
approach to stock selection. The chief criterion
here is the strength of a company's management.
This analysis is compared against technical and
quantitative screens prior to an investment being
made. We invest for growth, but growth at reasonable
price.
Step three consists of the actual
Investment Decision. Core long positions are selected
from those companies with proven management teams,
strong financial positions, well-defined growth
strategies, competitive advantages and pricing
power. Core short positions, by contrast, are
chosen from companies suffering declining business
prospects, weak financials and poor management
track records. Our price of entry is guided historically
and in comparison with an individual stock's peers.
Initial positions are targeted around the 1-2%
level and are increased if confidence is gained
in the initial investment decision. Most holdings
comprise no more than 5% of the total portfolio.
3. What financial objectives do you
aim to achieve with the recently launched offshore
version of the BluMont Hirsch Long/Short Fund
and is this the same strategy as the domestic
fund?
The objective of the domestic
and offshore long/short funds is the same. The
BluMont Hirsch Long/Short Offshore Fund tracks
the strategy of the successful BluMont Hirsch
Long/Short Fund which has a very successful track
record, having been in existence since January
2001 and having over C$82 million in assets under
management as of March 2005.
The offshore fund has been launched
because of increased demand by international investors
for a Canadian "play." We have found
that there are three predominant reasons why foreign
investors would want to look at investing with
a successful Canadian manager:
First, there is an increased
desire on the part of the international investment
community for non-US diversification. In fact,
many investors believe they have "North American"
exposure when they really only have "US"
exposure. Such exposure is being reconsidered
in light of recent US macroeconomic trends.
Second, international investors
wish to take advantage of commodity market movements.
Given: (i) recent trends in world commodity prices;
and (ii) the fact that the Canadian economy and
currency tend to be linked to commodity prices,
buying Canadian equities provides international
investors with an opportunity to take advantage
of increased Asian demand for commodities without
having to invest in these much riskier economies.
Third, Canadian markets are not
(yet) as efficient as their US and European counterparts.
This structural inefficiency provides investors
with opportunities that are not currently available
in the US or European markets. However, while
Canadian securities markets may not be as efficient,
they are still very well regulated.
4. You are not interested in large
caps, why is that so?
It is not that we are not interested
in large caps but we tend to focus on growth,
which tends to be found in the small- to mid-cap
sector.
5. Pairs trading - do you do that
for all the BluMont funds you manage?
Yes, whenever possible, although
this is not always possible due to the lack of
depth in the Canadian market in some industries.
For example, in the technology sector, we may
have to short a US stock. In some other industries,
we would have just a long position or a naked
short.
6. What is BluMont's relationship
with Integrated Asset Management Corp?
BluMont Capital Inc is 46.1%
owned by Toronto-based Integrated Asset Management
Corp, a premier alternative asset manager with
over C$2.6 billion in assets under management
and commitments. Top officers of Integrated Asset
Management Corp sit on the board of directors
of BluMont and also fill the roles of CFO and
Controller.
7. How are you treating the subject
of risk measures with the newly launched offshore
fund?
Risk is monitored, mitigated
and controlled in various ways.
Diversification is key. The fund
has typically 80 to 90 positions and the portfolio
is diversified across several industries, sectors
and securities. As the fund invests in many securities,
no single investment has been responsible for
a majority of returns in any calendar year.
Short selling is used to lower
market exposure. Pair trades are used to lower
sector/industry volatility and option strategies
are used to mitigate market risk and to lock in
profits. The fund uses cash as a tool to lower
exposure on a seasonal basis.
With respect to leverage, the
maximum leverage allowed is 200% of the fund's
NAV. Historically, however, very limited leverage
has been used. The Fund does not rely on leverage
to increase returns.
Liquidity is also a key criterion
when we look to buy individual securities. The
fund does not invest in private companies and
all stock positions are subject to minimum liquidity
screens.
The fund is also subject to continuous
monitoring: significant losses on individual (short
or long) positions warrant immediate attention
and overall risk budget and exposure levels as
well as portfolio allocation is reviewed weekly
by the CEO and senior management. Furthermore,
all trades are logged by BluMont's compliance
department and are reviewed to determine if they
are consistent with BluMont Capital's Trade Allocation
Policy.
8. What investments/sectors have worked
well and which have not in 2004?
Overall, we believe that those
sectors that worked well in 2004 are poised to
work well in 2005. First and foremost is the energy
sector: given oil price forecasts, we expect this
sector to remain strong for the foreseeable future.
We do not favour the financial sector in our portfolio,
as robust earnings growth in this sector is not
anticipated. In materials, we expect continued
performance from some of the large, commodity-based
names. Steel stocks performed well in 2004 but
we think that this over-performance is now over
and have taken profits. The Canadian telecom market
has undergone rationalisation over the last while
and is now subject to more rational pricing; although
telecom is currently a small part of our portfolio,
it is responsible for a good part of its positive
returns and we expect this sector to do well.
9. Are you developing
an appetite for Asian equities market?
For the most part, we will not
invest in non-Canadian stocks; however as per
the above, we invest in Canadian resources/energy
companies in order to indirectly benefit from
the large Asian appetite for the products of these
companies. Indeed, we believe this is a great
way to take advantage of Asian demand while at
the same time, taking advantage of the more stable,
well-regulated nature of Canadian capital markets.
10. BluMont recently
announced it will close the BluMont Hirsch Performance
Fund to new investors in either early March 2005
or upon reaching $150 million in AUM. Are you
structuring any new product offerings in the pipeline?
For the international audience
who will be reading this, the most important news
item is that on 1 February 2005, BluMont launched
the BluMont Hirsch Long/Short Offshore Fund. There
has been significant interest in this fund but
international investors must remember that given
the smaller size of the Canadian stock market,
capacity will be reached much sooner than for
an equivalent US or European long/short fund.
11. From the first two months of 2005,
which sectors do you think will be ahead of the
pack for the rest of the year?
Most notably, the energy sector.
Given oil price forecasts, we expect this sector
to remain strong.
12. What are some
of the current views on hedge funds in Canadian
equity market?
We are not bullish at the moment,
with the exception of energy stocks which are
somewhat of a double edged sword - although these
particular stocks may outperform the market, higher
energy costs are passed on, which tends to depress
earnings in other sectors. Given the current economic
environment of rising interest rates and energy
prices plus somewhat sluggish earnings growth,
it is difficult to be bullish on equity markets
over the short term.
Contact Details
Paul Patterson
Sales and Marketing Manager, Institutional and Offshore
BluMont Capital
+1 416 363 6526
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