Hedge funds are an essential tool for diversification of an investment
portfolio, especially when markets are volatile and move in zig-zag
patterns. You might have noticed a recent spate of articles with the
general theme of “the return of volatility.” While this is one signal of
market behavior, it can also be a call for investors to consider hedge
funds and alternative strategies.
The ratio of advancers-to-decliners in the past few years has been high, in
essence testing the competence of hedge fund managers who consistently
pursue long-short strategies. When the market is continually moving up,
long-short strategies can be challenging. A fund might post high returns on
its long positions, but these returns are cannibalized by the relatively
low or even negative returns from short positions. This is possible in the
market we have grown used to, where there is no volatility and markets
continued to move in only one direction, up.
As we look forward to Alternative IQ's 2018 Canadian Hedge Fund Awards, it might be useful to look
back at the past performance of some of Canada’s premier hedge funds in
2017. Listed in the table and graph below are selected hedge funds that
were showcased for their 1-year return track record in their respective
The slope of return over risk is analyzed to categorize performance to
yield one unit return for every unit of risk an investor accepts. Picton
Mahoney manager Philip Mesman has been able to use his investment mandate
to achieve alpha leading to a slope greater than 1 for its investors, being
the top-performing fund among its peers.
Shown in the table and graph below are a select few hedge funds that were
showcased for the 5-year return track record in their respective
Note the Barometer Global Macro Pool is included for its exceptional
performance in both 1-year and 5-year categories.
Notable here is that the CC&L mandate uses an internal team dedicated
to analyzing 12,000 stocks across developed and emerging equity markets
daily on various quantitative factors.
Donville Kent Capital Ideas Fund posted an impressive 12.79% return with an
annualized standard deviation of 7.63%. The fund equates to a slope of
1.68, being the top-performing fund among its peers in the 5-year category.
I spoke recently with Jesse Gamble, a portfolio manager at a Toronto-based
hedge fund Donville Kent Asset Management, to find out what factors enabled
the Donville Kent Capital Ideas Fund to rank among the best hedge funds in
“What makes a good company is return on equity. We believe in the theory of
reinvestment and compound returns,” said Gamble. “What creates a high ROE
business is stable and improving margins at the company level. These
companies offer an attractive risk-to-reward ratio as a byproduct of
selecting excellent companies, hence effectively managing risk,” he added.
According to Gamble, “While ROE is such a key metric, most managers simply
look at profit and not ROE. Gauging the stability of ROE is incredibly
important here at DKAM where we boil down the components and perform a
DuPont analysis to see where the accretion and dilution in growth is coming
from. We also take it one step further by looking at long-term contracts,
margins, if the company has high barriers to entry, and what type of market
in which it operates."
In addition to crunching the numbers, DKAM also focuses on corporate
management. “We like to know that the management of these superstar
companies speak our language,” says Gamble. “We need to know that
management knows and understands the company and industry,” he added.
Gamble concludes that this type of in-depth research “will help facilitate
management to effectively deploy capital to offer high returns for
shareholders. This is how we continue to excel in the hedge fund space and
offer great returns to our investors.”
Achieving high risk-adjusted returns is challenging in an extremely
competitive hedge fund universe. But with strong quantitative and
qualitative analysis, as well as looking beyond profitability and
attractive top and bottom numbers, you may be able to invest in something
worth multiple times what the market has priced for such companies.
Nash Swamy is Junior Analyst, Analytics & Data, at Fundata Canada Inc., a leading
source for investment fund information.
Notes and Disclaimers
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