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Hedge Fund of the Year: Shortlisted

The AlphaGen Volantis Fund is a UK small cap long/short equity fund which focuses on companies having a market capitalisation of less than £1 billion.

Launched in May 2002 and managed by Rob Giles and Adam McConkey, with the support of the UK small cap team, the fund's objective is to deliver a pattern of absolute returns with lower volatility than and low correlation to the FT Small Cap ex IT Share Index.

The fund returned a healthy 47.5% for investors in 2009 (US dollar A class). Giles and McConkey say they look to deliver these returns by blending together "research-driven earnings and growth-orientated, strategic positions with shorter-term opportunistic tactical positions".

Long positions in companies are taken "where we strongly believe they will generate unexpected earnings growth over the long term".

Circumstances in which the managers short stocks, they add, are where earnings look to be priced in ways that the managers believe will disappoint against expectations or where there is a structural weakness in the industry in which the company operates or in the franchise.

The managers also take an opportunistic approach, looking to add value by taking advantage of factors influencing stock prices over a shorter time frame. These they detail as earnings and other news announcements, broker upgrades and downgrades, sector rotation, market sentiment, the impact of stock placings, initial public offerings, relative performance and other technical factors. The opportunistic positions are expected to contribute equally to the returns.

The lack of industry research coverage for UK smaller companies plays to the fund's blended capabilities and requires a dedicated research team. The managers believe there is far greater scope for adding value through its own research. They point to three core elements in the way the smaller companies team generates ideas.

First, they have meetings with companies. This provides insight into individual companies' prospects and industry trends. The companies are then screened based on growth and unexpected earnings criteria which helps to highlight investment candidates. Finally, theme and trend analysis is done supported by the analysts providing direction for company investigation.

Once invested the managers have an ongoing dialogue with the management of the companies. This , they say, is a fundamental part of the research. Typically over 1,000 meetings are held with companies each year.

Like many hedge funds at the time, AlphaGen Volantis Fund saw assets fall in early 2009. The size of the fund dropped from £280 million on December 31, 2008 to £139 million in April/May 2009 as redemption notices submitted in late 2008 and early 2009 were met.

The managers say despite the scale of the redemptions and the relatively illiquid nature of the book, the fund did not impose a gate or take any actions to limit the ability of investors to redeem.

Prior to this the fund had been hard closed for a number of years. The redemptions provided the first opportunity for some investors to invest in the fund and for others to build on their existing positions.

As a result the fund has had significant inflows, including several from pension plans, Japanese institutional investors, wealth managers and family offices. At the end of February 2010  the fund was hard closed again with asets of £286 million, slightly above the previous close of the fund.

Fund facts: Alpha Volantis Fund

Full name of fund: AlphaGen Volantis Fund
Name of portfolio manager: Rob Giles and Adam McConkey
Name of investment manager: Gartmore Investment Management
Contact: Martin Phipps, 8 Fenchurch Place, London EC3M 4PB (+44 (0)20 7782 2891; martin.phipps@gartmore.com)
Launch date: 2002
Assets under management: £286 million (at March 31, 2010)
Annualised return: 17.2% (at March 31, 2010)
Annualised volatility: 9.1% (at March 31, 2010)
Sharpe ratio: 1.49
Strategy: equity long/short UK small cap
Share classes: US dollar, sterling and euro
Administrator: Citi Hedge Fund Services
Auditor: KPMG
Prime broker: UBS
Domicile: Cayman Islands
Listing: Irish Stock Exchange (classes A, B, C)
Management fee: 1.5% (classes A, B, C); 2% (classes D, E, F)
Performance fee: 20%
Minimum investment: $100,000
Redemption/liquidity terms: monthly dealing with 90 days notice for redemptions. Early redemption penalties of 2% under six months and 1% under 12 months apply