Dancing with the devil is all very well, but be prepared for when the music stops – an apt metaphor for the concentrated portfolio strategies employed by many hedge funds. Mimicking hedge fund managers’ plays is high risk and not suitable for private investors, but the research underpinning their convictions is worth attention.
First-quarter (Q1) letters to investors cover a variety of prescient topics, including opportunities and threats posed by stretched US valuations, China, the developed world’s productivity conundrum, and the direction of central banks’ monetary policy. The notes and reports also contain musings on existential issues, such as reappraising competing ideologies of socialism and capitalism. Of most interest to stockpickers will be the philosophy behind decisions to back certain companies.
For example, Spree Capital Advisers, managed by Thatcher Martin, bases its investing style on the “observation of the reflexive price behavior resulting from the intersection of quantitative factor investing, momentum trend followers, and high frequency traders”. In other words, it believes the feedback loop between automated and momentum investing has expanded the price multiples of some companies, but has created a value opportunity in the equity of other quality businesses. Citing investors’ trepidation around future Fed policy (despite Jay Powell’s efforts to roll back expectations of further rate hikes), a flattening yield curve in the quarter, trade wars and recession fears, Spree Capital took advantage of opportunities to invest in what it describes as “great businesses supported by long-term secular tailwinds that were selling at discounted valuations”.