Shortlist: Best sub-$100 million hedge fund

Active Alpha is an independent, management-owned investment company based in Pfäffikon, Switzerland. It was founded in July 2010 as a spin-off of the Horizon21 single hedge fund unit.

AA Equity is a trading-oriented long/short fund trading equities and equity derivatives. The fund differentiates itself by being nimble with a trading approach focused on shorter-term opportunities. It has no long or short bias and uses only liquid and exchange traded instruments.

The fund has low correlation to equities and other hedge funds. Given the focus on liquid instruments, Active Alpha believes the capacity of the fund is approximately $1 billion.

Typically the investment approach is contrarian and driven more by news, sentiment and technical analysis than by pure fundamental research.

Active Alpha’s investment principles are based on experience. It believes it offers versatility and experience in applying different investment styles. The focus is on markets the managers know best: the UK and US.

Liquidity is used to manage risk actively. Using liquid instruments allows the fund to trade large positions quickly and with little price impact. It can also quickly cut losses and therefore manage risks actively.

The fund managers are agnostic about market direction: the cash equity trading strategy prefers volatile markets and the fund should be able to produce attractive returns in calm markets by using equity options.

The fund focuses on large caps in the UK and US but offers a good sectoral diversification. For example, it makes allocations in energy, materials, industrials, consumer discretionary, consumer staples, healthcare, financials and information technology as well as using indexes and exchange traded funds.

The trading strategy is to capitalise on various types of mispricings and lead/lag relationships in equity and equity derivatives markets. A rough estimate of the mix of instrument types used is 50% equities, 30% options, 15% futures, 5% foreign exchange forwards.

The trading approach is active with active risk management, avoiding any mismatch between portfolio and investor liquidity.

The fund’s drawdowns are limited by adhering to strict limits set by the independent risk officer as well as the portfolio managers’ trading discipline. The fund’s net exposure is actively managed and typically varies between plus/minus 80% of net asset value (NAV). The fund’s average net exposure since inception is a positive 1.2%. The target volatility of the fund is 15%.

The strong performance of the fund during a period of unprecedented market stress and low correlation to other hedge funds and equities confirms, according to the fund’s managers, the attractiveness of the active trading approach. Net cumulative performance since inception stands at 23.48% with a positive 2009 performance of 19.57% and 19.57% in 2010.

The company’s chairman and CEO, Daniel Schweizer, and the two senior portfolio managers, Michael Uebersax and Silvio Zgraggen, have worked together for over 15 years. They share responsibility for the fund equally.

Active Alpha employs seven professionals and has outsourced a number of non-core functions to external providers.

Fund facts
Full name of fund: AA Equity
Name of portfolio manager: Michael Uebersax/Silvio Zgraggen
Name of investment/management company: Active Alpha
Contact information: Andres Hefti (chief risk officer/investor relations), Poststrasse 4, 8808 Pfäffikon, Switzerland (+41 55 415 23 35; andres.hefti@activealpha.ch; www.activealpha.com)
Launch date: September 1, 2008
Assets under management: $90.1 million (at February 28, 2011)
Net cumulative performance since inception: 23.48% (at March 31, 2011)
Performance year-by-year since inception: -2.78% (at March 31, 2011)
Annualised return since inception: 8.51% (at March 31, 2011)
Annualised volatility since inception: 11.05% (at March 31, 2011)
Sharpe ratio: 0.68
Strategy: trading-oriented equity long/short
Share classes: euro, Swiss franc, US dollar and sterling
Administrator: Citco Fund Services (Dublin)
Auditor: PricewaterhouseCoopers
Prime broker: Morgan Stanley and UBS
Legal counsel: Maples and Calder
Domicile: Cayman Islands
Management fee: 2%
Performance fee: 20% with high water mark
Minimum investment: €1 million (or equivalent)
Redemption/liquidity terms: monthly redemption with 15 calendar days’ notice