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Tuesday, June 18, 2019

Sooner or later, most hedge fund strategies pay off

Date: Wednesday, July 2, 2008
Author: Bob Thompson, Financial Post

I have a habit of discussing in this column hedge fund strategies and ideas that are out of favour. Sometimes I am right in recommending out-of-favour ideas, sometimes I am wrong. No, correct that. The idea is usually right sooner or later, it's a question of how long an investor is willing to wait.

I was reminded of this fact last week when I was in Chicago doing due diligence on one of the largest hedge fund companies in the world--Man Investments.

About a year ago I wrote about managed futures strategies in this column, and in particular the Man AHL Diversified Canada Fund.

Most managed futures funds performed poorly the year before. As usual, no money was flowing into the sector because investors were making decisions based on the previous year's performance.

As might be expected, the fund's performance improved after investors shunned it. In the last year, as credit markets dislocated, volatility increased and oil and gas surged, managed futures strategies have been on fire.

AHL Diversified Canada is a good diversifier of most portfolios. With basically zero correlation to world stocks, it tends to zig when your stock portfolio zags.

The AHL Diversified Programme is not as old as Man Group PLC, founded in 1783, but with an 18-year track record, it is one of the oldest and largest managed future strategies around.

While in Chicago, I talked with the investment team of Glenwood, a fund of hedge funds that is also part of Man. We discussed one of their products: the Man Glenwood Event and Activist Fund.

Activist investing has become noticeably popular as institutional holders are helping to guide boards and management in order to create value for shareholders. These "activist" shareowners encourage companies to spin off divisions, sell real estate, refocus the business, or employ a myriad of other strategies to generate value.

The problem is that this is generally a deep value approach, as the manager purchases companies that are distressed in some way. In credit crunches, or in markets where returns are narrowly focused, the approach underperforms as investors shun anything that isn't seen as top quality.

Management doesn't take too kindly to some hedge fund manager telling them how to run their business, however, it is an approach that probably will continue to attract attention. After all, some of the biggest companies around have been targets, including McDonald's Corp. (MCD/NYSE), H. J. Heinz Co. (HNZ/NYSE) and Wendy's International (WEN/NYSE). In the case of the latter, activists tried to extract value by having Wendy's spin off Canadian favourite doughnut and coffee shop, Tim Horton's Inc. (THI/TSX).

Many hedge fund strategies are simple. They don't involve complex derivatives or option trading, or "black box" strategies. What they do have is a more flexible approach than traditional investments. If you are looking for a good hedge manager, you simply want to identify someone with a fundamentally sound approach who is also an independent thinker. But believe me, that's easier said than done.


--- - Bob Thompson is an associate portfolio manager and alternative investment strategist at Canaccord Capital. Mr. Thompsonandhis team manage hedge fund portfolios for high net worth individuals.