Shortlist: Best equity long/short hedge fund, Hedge fund of the year

Henderson Alternative Investment Advisors' European Absolute Return Fund uses a bottom-up fundamental stock-picking approach. This has yielded an annualised return of 19.15% since inception in 2001.

The performance is attributed to the fund manager Stephen Peak’s experience in contrarian stock-picking. His career began in 1975 at Norwich Union. He then moved to ADIG Investment in Frankfurt and later Cornhill Insurance Group after which he joined Touche Remnant & Co in 1986 where he was head of the investment department.

Peak was appointed as a director of Henderson Global Investors following its acquisition of Touche Remnant in 1992. He is now head of the pan-European team.

Paul Casson, the fund’s other manager, is director of pan-European equities. He began his career in 1995 at KPMG before working at Martin Currie Investment Management and SVM Asset Management.

The contrarian approach identifies mispriced securities through bottom-up fundamental analysis. The maximum combined total holdings are 80 long and short stock positions, mainly in equities and contracts for difference (CFDs).

The strategy remains the same as in all market conditions. Research is mostly done in-house looking at a macroeconomic and sector level plus proprietary quantitative and company evaluation systems as well as numerous company visits. These screening activities are supported by a deep understanding of the general economic and political environment as it affects the markets as well as sensitivity to events that might act as catalysts for price movements.

The fund’s gross exposure is actively managed according to volatility and conviction. Long positions typically number between 50 and 100. The typical size of each long holding is between 3%-7% of the fund.

The long process rests on detailed analysis of companies’ market attractiveness, competitive positioning, financial position, quality of management and other factors with an emphasis on identifying fundamental or short-term misvaluations. Liquidity is not a concern on this side of the equation.

Short positions number between 30 and 60 and have a typical size of between 1% and 5% of the fund. The process rests on two types of trade. Longer-term short positions represent the reverse of the long process where poor fundamentals are identified as being likely to cause a fall in a company’s stock price. Short-term, pragmatic short positions are taken when overvaluations or particular catalysts for decline have been identified. On the short side close consideration is given to liquidity.

Before a holding is bought, the team looks at risk and reward as well as the probability of a successful outcome. By doing this for each potential holding, the universe can be narrowed down to situations where the managers think the market is incorrectly valuing the risk/reward or where they think the market is incorrectly implying a certain probability of a successful outcome.

Most hedging is done through single-stock shorts and the fund also uses derivatives to control exposure to the market. Currency exposure is sometimes hedged but is not speculated on.

Although the fund focuses on investment in listed European equities, it has maximum flexibility to invest in a wide range of investments, including listed and unlisted equities, options, warrants, futures, other equity derivatives and rated and unrated debt securities.

Fund facts
Full name of fund: Henderson European Absolute Return Fund
Name of portfolio managers: Stephen Peak and Paul Casson
Name of investment/management company: Henderson Alternative Investment Advisors Ltd

Contact information: Kate Grose, 201 Bishopsgate, London EC2M 3AE (+44 (0)20 7818 1818 (switchboard); +44 (0)20 7818 5350 (direct); +44 (0)20 7818 1819 (fax); kate.grose@henderson.com)
Launch date: June 1, 2001
Assets under management: $195.2 million (at December 31, 2010)
Annualised return since inception: 19.15 % (at March 31, 2011); 18.65% (euro at March 31, 2011)
Strategy: equity long/short
Share classes: US dollar, euro
Administrator: JP Morgan Hedge Fund Services (Dublin)
Auditor: PricewaterhouseCoopers (Dublin)
Custodian: Goldman Sachs International (London)
Prime broker: Goldman Sachs International (London)
Legal counsel: Simmons & Simmons (London)
Domicile: Cayman Islands
Listing: Irish Stock Exchange
Management fee: 1.5 %
Performance fee: 20% of net performance with high water mark
Minimum investment: $100,000 for US dollar shares; €100,000 for euro shares
Lock-in: none
Redemption/liquidity terms: 90 days’ notice period