From time to time, Hillsdale is in the news. Our partners often speak at conferences or other events, and our accomplishments are covered in the financial media.
Hedge Fund Investors’ Summit
Speaker: Arun Kaul, COO Hillsdale Investment Management
Date: January 30, 2002
Venue: Phoenician, Phoenix AZ
Synopsis: At the recent IMN Hedge Fund Investors’ Summit Arun Kaul, COO of Hillsdale Investment Management, took part in a panel discussion comprised of long/short managers who presented their strategies, their views on the market and their risk control methods to institutional investors. Jeremy Todd, Managing Director of Bear Stearns, chaired the panel and fellow industry panelists included Scott Johnson, Chairman and Chief Investment Officer of Sterling Johnson Capital and Paul Goldstein, President of Goldstein Capital. Kermit Claytor, Senior Analyst of Fund Advisors and Rick Lake, Co-Chairman of Lake Partners represented the institutional investors.
The discussion began examining the attributes of the long/short portfolios. The question was raised with greater beta typically exhibited on the short side, how do you handle this concern within the short portfolio? Arun answered, “At Hillsdale, the long and shorts are part of the same construction focus, although more risk factors are used to construct the shorts. Looking back at 1999, we saw betas at extremely high levels of 3 and 4. Consequently, we simply screen out securities exhibiting these high beta levels as they are too difficult to manage from a risk perspective.”
Managers were then requested to focus on specific stocks that they were currently short and why? Arun said, “We are equally weighted on both sides and focus on the attributes of the overall portfolio, as opposed to individual securities. There is alpha present in both the long and short portfolios and maintaining a consistent gap between the two is our primary focus.” Arun mentioned semiconductors and cable as two industry groups that were still showing up as having plenty of short candidates and on the stock specific side, GE and Coke are still held within the short portfolio.
How is your strategy getting better and to what degree have you learned from the mistakes of the past? “Part of our systematic process is a dynamic feedback loop. When the Canadian Market Neutral had a difficult January 2001, we focused on reducing volatility going forward. We have achieved this by increasing the number of stocks, tightening industry constraints and introducing a technical overlay that helped in taking quicker profits within the short portfolio.”
Going forward, how do you see the market environment unfolding? “ The level of volatility will remain high such that investors will be receiving lower risk-adjusted returns. The noise of the market will remain high and this must be recognized. We will introduce new factors to help with the risk control as the market volatility increases.” (See the recent interim report for a more detailed discussion of our views).
Have you ever had trouble borrowing a specific issue? “At Hillsdale, we are trading very liquid securities with mid to large market capitalizations and have always been able to borrow. All the brokers we deal with are large well-established firms and we have good relationships with all of them.
What is the biggest challenge going forward for the industry and managers as a whole? “Market efficiencies are changing. From a shorting perspective, alphas in both Canada and the US are similar. However, we see greater in-efficiencies in Canada and without the LBO firms and distressed debt strategies being employed, stocks in Canada can literally disappear. The situation is not the same in the US where Enron and K-mart will always find interested parties lurking. Niche strategies and capacity constraints will be of continued interest to investors.”
Industry consensus seems to be moving from a momentum-based environment to one of a stock-picking environment. Given your quantitative approach, how do you see yourselves fitting in? “The fact that we employ a systematic, fundamental approach does not rule Hillsdale out as stock-pickers. In fact, we view stock picking as one of our strengths and built into the modeling process. We do not have a style bias and this allows us to be immune to the vagaries of styles coming in and out of play. Longer-term, given the increasing level of volatility, one must be aware of factor biases, the modeling assumptions that were made and adjust accordingly. This is part of the dynamic process and feedback loop that we employ.”
Sponsor: Information Management Network