Shortlist: Best sub-$100 million hedge fund

The Henderson UK Equity Long Short Fund operates a medium-term strategy with a short-term tactical overlay.

Although the contrarian investment team uses external sources of information such as sell-side broker reports, the majority of research is undertaken in-house by the fund managers. The strategy is bottom-up and investment ideas come mainly from in-house research and are then looked at further to probe risk and reward.

Through this process the fund managers seek to find instances where they think the market is incorrectly valuing the risk/reward or incorrectly implying a certain probability of a successful outcome.

Bet-sizing, to look at the degree of risk within a trade, is then applied before a decision on whether to invest. The asset split is generally around 50% equity, 48% contracts for difference (CFD) with swaps and options accounting for 1% each.

Gross exposure is actively managed according to volatility and conviction, typically being 400%.

Long positions number between 50 and 12. These typically account for between 1% and 7% of the fund. Stock selection for long positions means looking at companies in markets with sustainable growth, positive capacity trends and where returns are protected by barriers to entry and where there is clear competitive advantage.

Pricing power is also sought. Companies with effective capital management, balance sheet strength, strong cashflow generation and conservative accounting policies are also looked at.

Valuation analysis emphasises not only return on capital employed but also earnings growth and cashflow trends.

Short positions are chosen using the same disciplines. This means the manager can identify overvalued companies and, because of the contrarian nature of the fund, look for opportunities to add positions when securities have become mis-valued as stocks have been over-bought or over-sold.

Short positions number between 30 and 125 with a typical weighting of between 1% and 5% of the fund.

The fund usually has a long bias but this depends on the attractiveness of ideas generated on the long and short side – bearing in mind that this is a bottom-up fund.

The bottom-up focus benefits from price anomalies caused by top-down views that can cause sector rotation and certain stocks to be in and out of favour. The market can also become overly focused on short-term catalysts for share price performance. This can lead to quality stocks being out of favour.

The fund’s managers expect this to continue and benefit from a good track record in exploiting such anomalies.

Stephen Peak’s investment management career began in 1975 at Norwich Union. He has also worked at ADIG Investment in Frankfurt and Cornhill Insurance Group. He joined Touche Remnant & Co in 1986 where he was head of the investment department. He was appointed as a director of Henderson Global Investors following its acquisition of Touche Remnant in 1992. He is head of the pan-European team.

Neil Hermon qualified as a chartered accountant at Ernst & Young. He then joined General Accident, which became Morley, as a small companies analyst in 1993 before becoming a fund manager in 1994. Hermon joined Henderson Global Investors in 2002 and is head of the pan-European smaller companies team.

Fund facts
Full name of fund: Henderson UK Equity Long Short Fund
Name of portfolio managers: Stephen Peak and Neil Hermon
Name of investment/management company: Henderson Alternative Investment Advisors
Contact information: Kate Grose, 201 Bishopsgate, London EC2M 3AE (+44 (0)20 7818 1818 (switchboard); +44 (0)20 7818 5350(direct); +44 (0)20 78181819 (fax); kate.grose@henderson.com)
Launch date: June 30, 2003
Net cumulative performance since inception, annualised: 13.37% (US dollar); 12.36% (euro)
Annualised return: 35.91% (one year at December 31, 2010)
Annualised volatility: 19.64% (one year at December 31, 2010)
Sharpe ratio: 1.7998 (one year at December 31, 2010)
Strategy: equity long/short
Share classes: US dollar, euro
Administrator: JP Morgan Hedge Fund Services (Dublin)
Auditor: PricewaterhouseCoopers
Prime broker: Morgan Stanley, Merrill Lynch, UBS
Legal counsel: Simmons & Simmons
Domicile: Cayman Islands
Listing: Irish Stock Exchange
Management fee: 1.50%
Performance fee: 20% of net
Minimum investment: $100,000
Lock-in: none
Redemption/liquidity terms: 30 days’ notice period; no redemption penalties