Oliver Haseley, Managing Partner, MainFirst – Equity Market Neutral Fund

Oliver Haseley is a founding member and Managing Partner at MainFirst. He is responsible for absolute return products.

LUXHEDGE :  Could you please describe your objective and investment policy of your fund ?

OLIVER HASELEY: The fund invests in Western European equities long/short within the same sector, commonly known as pair investing, without bearing any net market exposure. This investment strategy does not depend on rising asset prices, has a low volatility and no tail risk exposure.  Our goal is to generate steady positive returns in every market phase; the returns are uncorrelated to those of other asset classes.  Since the fund does not exhibit any exposure to the market and sectors, timing is not an issue. In other words, we are looking to generate pure alpha.
This Equity Market Neutral fund clearly goes further in terms of reducing the risk exposure than most of its competitors do as market neutrality is not only established at the fund level, but essentially within each sector.  Again, there is no market exposure, and no cross sector exposure.  Every long exposure in a given sector is compensated by a corresponding short exposure in money amount. The beta of the fund is also close to zero due to the fact that, on average, we tolerate a beta exposure of up to +/- 10%. On a pair level we allow beta, on the fund level not.


LH: Why do you invest primarily in core European mid and large companies? Furthermore, why do you invest mostly in equities of companies with a market capitalization of at least EUR 1 billion euros?

OH: We invest primarily in core European mid and large cap companies, as they offer the greatest amount of liquidity within our asset universe. Core European equities represent our area of competence in terms of understanding the business models, drivers and valuation.  We shy away from – though do not rule out entirely – companies with a market capitalization of less than 1 billion, as they often lack liquidity and exhibit erratic trading behaviour, such as jump diffusion.  That makes them less attractive, especially on the short side, where takeover risks are higher compared to mid/ large caps.


LH:  Where are you most active from a geographic and sectorial standpoint?

OH:  We look for opportunities within very tightly defined sectors such as for instance airlines or companies specialised in testing techniques and products.

In terms of geography, as already indicated, our focus lies on Western Europe.

From a sectorial viewpoint, we are currently predominantly active in basic materials, consumers (both cyclical and non-cyclical) and industrials. We were also marginally involved in the communication and energy sectors. At the end of December 2012, we had 26 different pair-trades situations in the portfolio.


LH: The investment strategy pertaining to this particular Sub-Fund of MainFirst SICAV, as stated in the issuing document, indicates that the assets are invested in shares and bonds issued by companies. Could you clarify this sentence a little more accurately?

OH: We do not currently invest in bonds, only in stocks and in a sector-neutral fashion.  All of our investment ideas are generated from qualitative and/or quantitative considerations. Fundamental research across the asset universe helps in identifying viable long or short candidates for the ultimate portfolio.  A quantitative cross check on the findings helps in identifying a proper peer to eliminate the sector risk.  Alternatively, quantitative research run across almost 2000 pairs split into 30 sectors helps us to identify pairs with promising risk-reward properties.  Qualitative research then enters as a cross check.


LH: Do you invest in derivative financial instruments?

OH: We invest in derivatives in order to comply with UCITS regulations, which require that our shorts be of synthetic nature, i.e. materialised through single stock futures traded on the exchange, contracts for difference (CFDs) or total return swaps.


LH: How do you manage your risks from a quantitative viewpoint?

OH: The RiskMetrics database is used to calculate the fund’s Value at Risk (VAR) on a daily basis. Furthermore, the fund’s portfolio is stressed against a variety of scenarios, many of them historical. Given that we only take on intra-sector risk in our diversified portfolio, the only meaningful remaining risk lies in our stock-selection ability. We hedge the currency risk. We do not tolerate an overall beta of more than 10% at the fund’s level. And we have only very limited country risks as we focus on core European countries rather than the Southern part of Europe.


LH: How does MainFirst Equity Market Neutral Fund stand in terms of 2012 performance compared to its peers?

OH: 2012 was indeed our first complete fiscal year. It is therefore still too early to really comment on this topic. We reckon that our 4.3% recorded for this 12-month period is actually pretty satisfactory if we consider that our volatility is certainly one of the lowest observed among a dozen of UCITS funds operating in this true equity market neutral arena. We are primarily interested in offering our investors an attractive and regular annual risk-adjusted performance. We are more than satisfied with the result as, given the high degree of market uncertainty and consequently high level of volatility, the gross exposure was on average significantly below the target corridor in 2012.
Noteworthy is also the fact, that roughly 2/3 of our pair-trades wound up in the green.


LH: What stocks and sectors do you find interesting at the moment and why?

OH: We do not rely on outperformance in one sector versus another; as we do not take on inter sector risk.  We need stocks for which we are able to trade on their fundamentals which they ultimately always do. We only look for outperformers versus underperformers within a tightly defined sector.


LH: How do you approach valuation? How do you do the valuation of a stock?

OH: Our valuations are based on a systematic and in-depth fundamental research of the companies that we invest in. Unlike “long-only” investors, however, we do not value the companies within our asset universe independent of each other, but merely seek to identify promising risk reward situations in relative valuation terms.  Hence we might come to the conclusion that BMW is attractive relative Daimler, without having specific “fair values” or “price targets” for one or the other.  We combine historical metrics such as Earnings and EBITDA growth, as well as stability with current consensus data. As a general rule we typically like high quality firms trading a suppressed valuation premia and dislike names of lesser quality with lofty valuations relative to the quality of the enterprise.


LH: How liquid is your portfolio?

OH: The portfolio is highly liquid and could be easily be liquidated within a day without incurring significant slippage.


LUXHEDGE: Thank you very much Mr Haseley.