Institutional investors have become sceptical of hedge funds, particularly since so many have proved to be no more than expensive purveyors of beta. SIMON MUMME profiles one domestic marketneutral manager, TechInvest, which argues it has lived up to the sales pitch.
“Valuation itself is the treasure and jewel of the valued things,” writes Friedrich Nietzsche, the existentialist philosopher. He spent much of his time fighting to unlock life’s vitalities. “Through valuation only is there value; and without valuation, the nut of existence would be hollow.” People familiar with Sydney-based hedge fund, TechInvest, will recognise the quote since it accompanies the signature of its founder and head of research, Paul Davis, in each email correspondence. He says it encapsulates the importance of backing a worthy conviction. For an active manager, this means identifying the fundamentals and future profitability of businesses and how accurately they are reflected in the sharemarket.
“Someone has to be active. If everybody indexes, how do you know who’s wrong? If people invest solely on the basis of market capitalisation, you never get capital reallocation, and you get no growth,” Davis says. “Only through people going against this wisdom do you get value creation.” So far, the manager’s market-neutral global equities fund, the Intercept Capital Fund, which notched up its first fiveyear return last month, outperformed relative to its cash benchmark while all markets went to hell. For the 12 months to February 2009, it returned 7.34 per cent. Since inception, it has generated 9.84 per cent each year after fees, against the UBS Australia Bank Bills Index return of 6.3 per cent each year.
Concentrating on the knowledge industries of technology, telecommunications and health care, the Intercept fund aims to identify companies that will benefit or be harmed by impending structural change in those industries, and builds long and short portfolios accordingly. The manager, which formed amid the irrational tech-frenzy of the late 1990s, has always viewed technology as a growth sector. Davis has worked in California’s Silicon Valley, and later ran his own venture capital firm, which spawned E*TRADE in Australia, prior to starting TechInvest. “He’s a software nut,” says Ashley Young, portfolio manager with the boutique. “Paul has been there through the entire life cycle of companies, from start-up to mature businesses.”