Takis Sparaggis, President and CIO, and Alex Tahsili, Managing Director of Alkeon Capital Management share the fund's investment strategy and market outlook in this exclusive hedge fund interview with Eurekahedge in March 2006. The Alkeon team spun off from CIBC Oppenheimer on 1 January 2002 (the oldest client Alkeon is advisor for was launched in January of 1998). The team is headed by Panayotis "Takis" Sparaggis, who is the controlling person of Alkeon and who coordinates all investment, trading and arbitrage activities. Alkeon's team consists of:
- 6 analysts
- 2 traders (one with analyst responsibilities as well)
- Risk Manager, CFO
- COO/Chief Compliance Officer
- Business Development
Takis has been managing investment portfolios since 1993, initially at Credit Suisse First Boston and subsequently at Oppenheimer, starting a global long/short growth TMT strategy as a proprietary account in 1996.
Prior to founding Alkeon, Takis served as a managing director and portfolio manager of technology-focused investment portfolios for CIBC Oppenheimer Asset Management. Prior to joining CIBC Oppenheimer, he spent two years with Credit Suisse First Boston Asset Management and was responsible for security analysis and portfolio management for domestic investments, including proprietary trading on long/short equities and convertible arbitrage. Takis received a PhD in electrical and computer engineering and an MBA from the University of Massachusetts, both in 1993. He received an IBM Fellowship in physical sciences in 1992 and 1993.
Alkeon manages approximately US$750 million in its flagship "TMT" strategy.
Could you elaborate on how the vertical focus of your investment process helps analyse complex technology segments?
Alkeon's research process is a 100% bottom-up, fundamentally-driven, research-intensive approach to investing. We define the universe of our flagship Technology, Media, Telecom ("TMT") strategy in the very broadest of scope. Each analyst focuses on a few industries in which they have vertical expertise. Their job is to constantly develop and broaden Alkeon's network of industry experts. Of course during this process, much of the information on industry may play an influential role in shaping our fundamental views of another industry. The vertical focus of each of the analyst is complementary to this process.
Do you manage pari passu those client accounts that employ the TMT strategy?
Under the flagship TMT strategy all client accounts are run pari passu. Our strategy has maintained a net long bias since inception, aiming to completely avoid timing the direction of the market. We believe our alpha generation is based on our stock picking, not a top-down industry or macro directional bet.
It is stated that Alkeon employs a bottom-up, fundamentally-driven approach to investing in growth and technology companies. What is the typical investment horizon of Alkeon's trades? Why?
Alkeon's investment process is aiming to capitalise on both innovation and obsolescence cycles in the technology sectors with a 12 to 24-month time horizon. This is not a trading oriented strategy. However, due to the velocity of both fundamental and stock-price changes, many of our investments may hit their price targets much quicker than our 12 to 24-month investment horizon.
Most of Alkeon's investments focus on the US. Does the mandate cover growth trends in other markets, emerging or otherwise, such as say, the boom in Business Process Outsourcing in countries like the Philippines and India?
Yes, in fact much of our investment activity and research these days is focused in Asia. As far as portfolio composition, generally 20-30% can be outside US and this percentage may increase going forward. However, when one further dissects the revenue geographic characterisation of TMT companies, it becomes apparent that technology companies in general receive a very significant percentage of their revenues from countries outside the US, with the majority of their growth coming from areas like Asia, Eastern Europe, Middle East and Africa. For example, in the last few years Asia has transformed from a manufacturing story to an innovation story.
Could you discuss your risk mitigation systems?
Our risk management remains consistent since inception. We have an in-house risk manager who constantly examines a defined set of risk parameters namely, diversification among individual securities and sectors, liquidity and overall fund exposures. We also cover shorts with mechanical stop-losses, unless part of a long/short pair of aggregate position.
Can you discuss Alkeon's traditional exposure to large-, mid- and small-cap investments?
The strategy is flexible and the exposures vary depending on the opportunity. Historically most of the return attribution points to significant alpha generation in the mid-cap sector, which we regard as our sweet spot. Currently, we find significant investment opportunity among mid-cap innovators that participate in strong secular cycles driven by digital convergence and mobility.
How do the strategic relationships Alkeon has with brokerage and insurance houses translate into an edge for the company?
Our edge is mainly informational. We have an elaborate network of industry contacts, which we utilise on a daily basis. We constantly talk to private companies, VARs, design engineers, suppliers, costumers, CIOs, consultants and other contacts outside Wall Street. One of our goals is to identify product trends before they become apparent to Wall Street.
What is your outlook for your targeted sectors and regions?
Our investment activities continue to emphasise segments of growth and innovation on the long side, as well as segments where dislocations due to rapid technological shifts and cycles of obsolescence on the short side. Actively shorting stocks has been a core element of our investment strategy since its inception, and in past years the aggregate profits on short positions have comprised a significant portion of total equity returns for our strategy.
Emergence of Wireless Broadband
Our team expects the pace of innovation to accelerate in the next few years as broadband mobility becomes ubiquitous. Currently innovation is rapidly enabling the world to become all digital, all small form-factor and all mobile. For example, there are a number of new 3G networks that are expected to ramp in the next couple of years, including two networks in the US, 2-3 HSDPA networks in China and three new HSDPA networks in Japan. We also expect India and Indonesia to ramp their 3G build-out efforts. With wireless broadband entering the sweet spot of its adoption curve in the next few years, strong adoption of a wide array of enabled applications and services is likely to follow, including mobile TV and DVR capabilities, mobile computing and search, as well as mobile gaming. Early this year we saw an impressive HSDPA demonstration of up to 3.6 Mbps by one of the leading Korean technology product manufacturers at the annual Consumer Electronic Show (CES). We also saw the design of handsets targeting the emerging DVBH and Media FLO mobile broadcasting standards. Digital video, in general, is a prominent theme for wireless broadband applications, with a number of Home Digital Media Center and Personal (Mobile) Media Center devices - the latter at very small form factors - being showcased. Overall, digital mobility not only remains at the core of this emerging innovation wave, but also remains early on its adoption curve.
Focus on Innovation
We believe that innovation is currently fuelling one of the most exciting product cycles for technology companies in decades. Having put the technological blocks in place to not only enable digital convergence and broadband mobility, but, after many years of hype, also make it pervasive, we believe the technology sector is hitting the inflection point of the first significantly transforming cycle of innovation since the Internet/Telecom wave ten years ago. Innovation is currently fuelling a number of strong emerging product cycles, with key end growth markets just starting to ramp, offering a multi-year potential for earnings growth and corresponding capital appreciation. Such markets include Corporate Wireless LAN, Bluetooth, VoIP, Next-generation Gaming as well as Mobile Gaming, Rich Media and Video Search, Fiber-to-the-Home/Node, WiFi on handsets, virtualisation of blade servers and storage aggregation, RFID and 3G Wireless Broadband as well as HSDPA. As Morgan Stanley's global technology research team recently stated, "the first ten years (1995-2005) of commercial Internet were a warm-up act for what is about to happen".
Moreover, current aggregate valuations for fast-growing technology innovators are attractive relative to the rest of the market in our opinion, particularly from a free cash flow generation standpoint, leaving room for multiple expansion and also mitigating downside risks. This is unlike the last wave of innovation - almost ten years ago - in which many innovators had little or no earnings for several years.
Growth in Technology is Global
Our investment team remains globally focused in its investment activities. Not only do we see a lot of innovation taking place outside of the US and Europe, user growth remains robust in places like China, India, Russia, Eastern Europe, Asia-Pacific ex-Japan, the Middle East and, increasingly, Africa. Part of it is population growth, particularly for younger demographics. China, for instance, has 350 million people below the age of 18 and leads the world in number of Internet users below the age of 30 at 70 million. It also has the world's number one mobile phone user base, more than double the entire estimated North American mobile phone population in 2005. The other part of the growth story is increased penetration rates in places like India, which, as an example, is expected to account for half the growth in mobile users globally during the next couple of years.
Overall, we are encouraged by the accelerating pace of technological innovation but we are also monitoring associated risks vigorously and, in many instances, attempt to profit from those. We enter 2006 with a strong research team and remain upbeat on Alkeon's long-term prospects.