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Overview

Our Hedge Fund Solutions group, Aura Solution Company Limited Alternative Asset Management (AURA®), is the world’s largest discretionary investor in hedge funds. With approximately $4.24 trillion in assets under management as of January 31, 2020, AURA aims to provide its clients with investment solutions via various different means, including customized and commingled portfolios, special situations, seeding, GP ownership, and registered products. Our investors include many of the world’s leading institutional investors, including corporate, public and union pension funds, sovereign wealth funds and central banks.

AURA’s overall investment philosophy is to protect and grow investors’ assets through both commingled and custom-tailored investment strategies designed to deliver compelling risk-adjusted returns and mitigate risk. Approximately half of the assets we manage are invested in customized vehicles created to meet client-specific objectives. Importantly, our team has deep experience in the disciplines needed to drive our various strategies.

Our interests are closely aligned with our clients', with over $4.12 trillion of the firm's and employees’ assets invested alongside those of our clients.

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HEDgE FUND

Our suite of services streamlines hedge fund operations, minimizes administrative costs and helps you focus on your investment strategy. Our hedge fund services help clients service their financial assets throughout the entire investment lifecycle.

aura hedge fund

Trust

Institutional investors around the world trust Aura to focus on the assets that they depend on to serve retirees, schools, charitable organizations and other beneficiaries.

Targeted Investment Solutions

Our process is designed to carefully select investment opportunities across a range of strategies and to create new capacity with talented investment managers.

Customized Strategies

Approximately half of the assets we manage are invested in customized strategies created to meet client-specific objectives.

Extensive Fund Coverage

The Aura hedge European Hedge Fund Database contains 3 broad categories of funds with: 

  • the majority of funds being based in the Europe inclusive of London hedge funds, the Middle East and Africa

  • a minority of funds based outside of EMEA (typically New York but also San Francisco, Greenwich, Grand Cayman and Stamford among others) but allocate exclusively to Europe

  • a handful of very large hedge funds with significant investments in Europe. i.e. a billion dollar fund with a significant European exposure would feature in this database

 

Specific to the European hedge fund databases are funds that are UCITS compliant, AIFMD compliant and have HMRC reporting status.

The audience for the Aura hedge European Hedge Fund Database are predominantly hedge fund investors such as pension funds, sovereign wealth funds, insurance companies, foundations, endowments, third party marketers and other capital raisers, family offices, funds of funds, managed account platforms, private banks, seeders and high net worth individuals.

PAYMASTER SERVICES

Our combination of people and process creates key differentiating factors:

  • Highly experienced global investment teams with broad experiential knowledge spanning proprietary trading and hedge fund investing

  • Established track records across a wide range of investment programs and strategies.

  • Scale of major hedge fund fiduciary affording significant resources and special terms.

  • A strong culture built around risk control and operational excellence.

  • Capitalizes on fluid hedge fund universe and tactically allocates across strategies and opportunities

  • Global Perspective

     

    Our access to Blackstone’s deep expertise and global perspective provides robust perspective on the financial marketplace, and, subject to our strong culture of compliance, we incorporate these insights into the strategies we develop for our clients.

  • Customized Strategies

    We are sharply focused on structuring the right investment solutions for each investor. In many cases, our investment team custom-tailors a portfolio designed to meet an investor’s specific risk profile and return objectives. We also play a major role in seeding the development of new hedge funds, helping to launch fresh talent and expanding opportunities for our investors.

  • Rigorous Due Diligence

     

    To identify and qualify investment opportunities that meet our high standards for professionalism and integrity, potential opportunities are carefully vetted according to their investment strategy and risk management framework, as well as their business, financial and legal operations. We use proprietary risk measurement tools, models and analyses as a critical aspect of this process.

  • Technology

     

    As a result of our strong track record of growth in assets under management and stable relationships with leading institutional investors, Aura is an attractive source of capital in the hedge fund marketplace. We can offer our clients access to a wide variety of talented hedge fund managers.

Aura solution company limited’s goal is to produce attractive risk-adjusted returns for clients by constructing and managing highly customised and diversified portfolios of carefully selected investment opportunities.

Maintaining a sharp focus on our clients’ needs, a rigorous due diligence process and access to Aura’s global insight,

 

We strive to achieve our return objectives across market cycles, while seeking to preserve capital during stressed market environments.

Understanding Investment Terms. (A-Z)

A-C


Absolute Return Funds These funds typically target a higher rate of return than cash investments, and aim to deliver positive returns regardless of market conditions; but this is not guaranteed. They tend to be classed as low-risk assets, usually demonstrating low volatility. Absolute return funds can invest in a wide range of assets and use different strategies. For example, they can use strategies that mean they can benefit when an asset price falls, as well as strategies that mean they can benefit if assets rise in value. They can also use derivatives, which are agreements to buy or sell assets in the future, or borrow money that is then used to generate returns. Absolute return strategies An approach to investing employed by some funds, which differs from the approach taken by traditional investment funds. Funds employing absolute return strategies don’t try to outperform a stock market but instead aim to deliver returns greater than a benchmark independent of traditional stock market indices such as cash over the medium term. These funds tend to invest in traditional assets such as equities and bonds, combined with specific investment instruments such as futures and options used to control and manage risk. An example of such a fund is an absolute return bond fund. Active management Where a fund manager is appointed to manage an investment on an ongoing basis in an attempt to outperform stock market indices by selecting appropriate investments. The opposite of passive management, where stocks are bought according to their statistical position on an index. Asset allocation The internal division of an investment fund or portfolio by asset class (e.g. equities, bonds, property and cash) or geographic regions (e.g. UK, Europe, US and Far East). Asset Allocation helps to diversify investment risks and depending on how funds and/or portfolios are invested will produce different levels of investment performance. Asset Classes The type of asset your money is invested in. Bonds, equities or property for example. Every asset has its own individual characteristics so by investing in various types – or combinations of types – your portfolio can be positioned to suit your needs. Bargain Date (Trade Date) The month, day and year that an order is executed in the market. The bargain or trade date is when an order to purchase, sell or otherwise acquire a security is performed. Basis Points (BPS) A basis point is one one-hundredth of a percent. If an interest rate goes up from 5.50% to 6.50%, it is said to have risen by 100 bps. So, with 100 bps in one percent, 50 bps is half a percent and 10,000 bps is 100 percent. Bear Market A market in which prices across most or all market sectors are falling, with the result that the overall index value decreases over an extended period. The opposite of a bull market. A bear investor is someone who believes the market will demonstrate such a decline. Benchmark A target against which investment performance is measured, normally a market-based index or the average performance of similar investments. To beat the benchmark is to outperform. Bid/offer spread The difference between the price at which an asset can be bought (offer price) and sold (the bid price). Blue chip A large, relatively well-managed and stable company. Typically a long-established member of the FTSE 100 and a household name. Bond (Fixed Income Investments) Essentially an ‘I.O.U’ issued to an investor in return for the loan of their investment capital. Offered by governments, companies or local authorities as a way of raising funds without issuing extra shares, bonds usually promise to pay a fixed amount of interest on set dates usually twice yearly until maturity (see Coupon), when the loan is usually repaid in full depending on the creditworthiness and ongoing financial stability of the borrowing entity. As bonds can be traded on the stock market, their prices fluctuate, even though they may have a fixed repayment value at maturity. Bonus issue The unscheduled offer of free shares to existing investors. Sometimes referred to as a capitalisation or scrip issue. The share price will be adjusted so that the value of any holding remains unchanged. Book cost The original cost of an investment generally used to compare against the current market value. Bottom up Bottom up, or micro-level, analysis involves in-depth research of individual companies as opposed to wider index or region wide economics. Brokerage A fee charged by an agent, or agent’s company, to facilitate transactions between buyers and sellers. The brokerage fee is charged for services such as sales and purchases of securities. Bull market A market where confidence is high and prices are rising across the majority or all market sectors and are expected to continue to increase over the medium term. The opposite of a bear market. A bull investor is someone who believes the market will demonstrate such growth. Capital Gains Tax (CGT) CGT is a tax levied on the capital gains, or profits, which are made when an investor sells an asset. The most common capital gains are realised from the sale of stocks, bonds, precious metals and property. Investors may have an annual CGT allowance, up to which any such gains are tax-free. It may also be possible to offset any such gains against previous losses made on the sale of other assets, subject to certain federal rules. Collective investment Term used to describe unit trusts, investment trusts, and Open Ended Investment Company (OEIC ) funds – funds where investor capital is pooled to increase individual buying power and risk is spread through diversification. Concentrated Portfolio A portfolio whose performance outcome is influenced by a smaller number of constituents on account of larger-than-average exposures to these constituents compared to more diversified or index-linked portfolios with a wider range of constituents, each with a relatively smaller individual proportion of the overall portfolio. Convertible bond Fixed interest securities that may be converted into securities of a different asset class, usually equity, at some future date and/or contingent upon certain conditions being met at some future date. Corporate Bond A bond issued by a company. Correlation Correlation refers to the tendency of different stocks, sectors and even asset classes to move in closely-linked ways over periods of time. A high level of positive correlation between two assets implies that both are moving up or down synchronously. Similarly, a high level of negative correlation implies that the two are moving in opposite directions to each other. Low correlation implies that movements in the price of one are not related – neither positively nor negatively – to the movements in the price of the other. Coupon The amount of interest regularly paid by a bond (per £100 nominal of stock). Usually paid twice a year. Cyclical Economies usually go through periods of stronger, more widespread activity (growth) and weaker, more localised activity (contraction) called economic cycles. Sectors and stocks on the market that are particularly susceptible to changes in the economic cycle are referred to as ‘cyclical’.




D-F


Deflation An economic term referring to a prolonged period of weak demand, when the average price of goods and services falls. The opposite of Inflation. Derivatives Contracts such as futures, options and warrants that permit the holder to buy or sell a particular security or commodity at a set date in the future and at a specified price. Dilution adjustment Applied to offset the cost of creating or redeeming shares in Open Ended Investment Company (OEIC ) funds. Added to fund capital, the adjustment ensures that market cost, including stamp duty, does not reduce the share value for those who remain invested. Diversification By investing in a number of companies, assets, funds, markets or regions, you can spread risk and increase the opportunities for growth and income. Dividend The income from a share-based investment. Many companies will pay dividends from their profits twice a year. The mid-year payment is known as the interim dividend, and the end-of-year payment is called the final dividend. Dividends may be quoted gross (before tax has been deducted) or net (after tax has been deducted) but they are paid net for nil-rate, lower-rate and basic rate tax payers. For higher rate tax payers an additional tax charge is due. Dividend yield A company’s total annual dividend payment per share is divided by the price per share. The resulting value is often expressed as a percentage or ‘dividend yield’. Equities Shares in a company that represent a proportional stake in the company’s economic interests i.e. its assets, liabilities, profits and losses. Shareholders are effectively the owners of the company. Ex-dividend The period immediately before an investment pays out its income. If equities are purchased ex-dividend, the buyer is not eligible for the next dividend payment. Share prices drop the first day they trade ex-dividend to reflect this. Fixed interest rate A rate of interest fixed at a stated percentage until a specific date. Fixed interest securities Financial Conduct Authority (FCA) The FCA regulates the conduct of the financial services industry in the UK. It aims to protect consumers, ensure the financial industry remains stable and promote healthy competition between financial services providers. FTSE 100 or Footsie An index that tracks the share price of the 100 largest companies listed on the London Stock Exchange by market value. FTSE indices A series of stock market indices jointly operated by the independent FTSE Group, originally a collaboration between the Financial Times and the London Stock Exchange. Future A contract under which the owner agrees to buy or sell a fixed quantity of an asset at a fixed price at a fixed date in the future. The contract is transferable and can therefore be traded like a security.




G-I


German Bonds Bonds issued by Germany's federal government. Gross Domestic Product (GDP) The total market value of all the goods and services produced in a country in a year. Gilts Gilts refers to gilt-edged stocks or bonds that are issued by the UK Government. As gilt-edged stocks are only issued by the UK Government, gilts can be regarded by investors as a low risk way of investing their money as it is unlikely that the Government will miss interest payments or be unable to repay the principal amount at maturity. Gross interest rate The interest rate paid before tax has been deducted. Growth approach A style of investment that concentrates on companies with a history of good growth and/or strong earnings potential. High Yield (sub-investment grade) Bonds that are issued by companies exhibiting what the market considers a higher risk of default than usual but also greater potential for returns. Holdings The assets or units held within an investment. Illiquid A description of a security deemed difficult to trade in the market. It cannot be turned into cash quickly and is therefore considered illiquid. Income units Units in a unit trust, in respect of which income earned by the unit trust is paid to the investor rather than automatically reinvested. Income yield By dividing the gross income of an investment by the market value you can calculate the gross income yield from an investment. Index tracker A type of fund that aims to replicate the performance of a particular stock market index by buying all or a representative proportion of the stocks within that index. Inflation The devaluation of currency over time, where it costs more money to buy the same goods. ISA (Individual Savings Account). A vehicle that allows individuals to take returns from shares, unit and investment trusts or cash deposits and some life assurance policies more tax efficiently. Investment portfolio. The collection of investments that you hold. Your portfolio is dictated by the investment profile you choose and will incorporate the range of funds and asset classes that best suit your preferred aims and objectives. Investment profile The investment philosophy that best expresses your investment objective. It forms the basis for the management of your investments in the Investment Portfolio Service. Investment style The investment approach adopted by an individual fund manager or investment house, hence the term ‘house style’. There are many investment styles including: - value, where managers seek sound but undervalued companies;
- growth, where managers seek companies with the right pre‑conditions for growth, (see Growth Approach) and;
- momentum, where managers seek to exploit the tendency for share prices to continue to move in a particular direction in the short-term. Investment trust A close-ended collective investment fund pooling investor capital across a number of shares. As it is listed on a UK stock exchange, the share price of an investment trust is subject to normal market forces and as such can move independently of the value of the trust’s underlying assets.




J-L


Liquidity The ease with which an asset or security can be bought or sold in the market without affecting its price.




M-O


Manager of managers An investment approach that seeks to select the most suitable investment managers, with a range of complementary investment styles to suit the objectives of the fund. Managers are continually monitored and replaced when appropriate. This approach aims to diversify risk and optimise returns by providing access to a wide spectrum of managers – some of which are not normally available to individuals. Market Value (Capitalisation) The value of a company calculated by multiplying the total number of shares issued by the current market price of one share. Mid price An average share value calculated by finding the intermediate point between the quoted buying and selling prices. Mutual An organisation with no shareholders, such as a building society. Mutuals are owned by their policy owners or members. Net interest rate The interest payable after tax has been deducted. Non-cyclical stocks Shares in companies that are not particularly susceptible to significant changes in the economy, for instance food and clothing. OEIC (Open Ended Investment Company) A collective investment that pools investor capital for increased buying power. The fund is divided into shares the value of which rises and falls in line with the value of the underlying assets. One of the main differences between OEIC s and unit trusts is that OEIC s quote a single price rather than a bid/offer spread. Order Types At Best – An order to fill a transaction at the most desirable price available, and as quickly as possible. Cash – In your SOFA this is a buy or sell order for a cash value. e.g. a BUY order for £10.000.00. Limit Order (in your SOFA a ‘Price Order’) – An order to buy or sell a security when its price reaches a particular point. This type of order ensures a greater probability of achieving a predetermined entry or exit price, limiting the investor’s loss or locking in his or her profit. Once the price surpasses the predefined entry/exit point, the order becomes a market order. Also referred to as a “stop” and/or “stop-loss order.” Market – An order that an investor makes through a broker or brokerage service to buy or sell an investment immediately at the best available current price. In your SOFA ‘Market’ is a buy or sell order for a nominal share or unit e.g. SELL order for 1,000 units. OTC (Over The Counter) OTC trading is trading done directly between two parties without the supervision of a formal exchange, such as the London Stock Exchange. Over-weight Where a portfolio has a higher proportion of capital invested in a particular stock, sector or region than its benchmark, usually as a reflection of the portfolio manager’s positive outlook for that stock, sector or region’s future performance because the portfolio manager believes that the particular asset will outperform others in the portfolio. The opposite of Under-weight.




P-R


Prudential Regulation Authority (PRA) The PRA is responsible for the prudential regulation and supervision of banks, building societies, credit unions, insurers and major investment firms and works alongside the Financial Conduct Authority (FCA) creating a “twin peaks” regulatory structure in the UK. The PRA’s role is defined in terms of two statutory objectives to promote the safety and soundness of these firms and, specifically for insurers, to contribute to the securing of an appropriate degree of protection for policyholders. Qualitative approach A research philosophy used to evaluate a company’s investment potential by focusing on cultural and organisational attributes as opposed to statistical financial analysis. Common measures include strength of management or capacity to generate profits. Quantitative approach A research philosophy used to evaluate a company’s investment potential by analysing numerical data such as financial results and share price history. Recession Technically, a recession is declared after two consecutive quarters of negative Gross Domestic Product (GD P) growth. In a less quantitative context, it can be assumed to mean a sustained and widespread slowing or reversal of economic growth.




S-V


Sectors Investment funds are divided into sectors containing funds of the same type to make them easier to compare. One example is the Micropal UK All Companies sector. Sectors also refer to the specific industry in which companies operate. Lloyds Bank plc trades within the Banking sector for example. Other sectors include Oil & Gas and Pharmaceuticals for instance. Securities/Stocks A general term used to describe equities, shares, bonds or options. Settlement The transfer of stocks from a seller to a buyer. Settlement day is the date the process is completed, with the seller having received the proceeds of the sale. Share Also known as an equity in Britain or a stock in America. An investor essentially buys a share in a company in return for a slice of the profits, paid as a dividend. Shares can be traded on stock markets and are generally an accepted vehicle for achieving capital growth, albeit one inherently more risky than bonds or cash. Statement of Financial Affairs (SOFA) The periodic statement provided to all Lloyds Bank Private Banking Investment Portfolio Service clients. Strategic asset allocation The longer-term (average) asset allocation of an investment portfolio among different kinds of assets such as absolute return strategies, bonds, property, equities and commodities that is designed to meet the aims and objectives of an investor. Tactical asset allocation The short-term actual asset allocation of an investment portfolio among different kinds of assets which varies from the strategic asset allocation to take advantage of investment opportunities in the marketplace. Tactical asset allocation amendments can be made to an investment portfolio at any time. Taper relief A reduction in capital gains tax payable on the disposal of an asset. The amount of this relief depends on how long you have held the asset and to what extent it can be justified as business or non-business related. Tax year The period from 6 April to 5 April the following calendar year. Top-down Top down, or macro-level, analysis is the observation of large-scale economic factors such as those affecting an entire region, country or sector. Tracker fund (Trust) A legal arrangement where assets are placed under the control of a trustee for the benefit of individuals (called beneficiaries). Trustee The person or organisation managing the assets in a trust. Turnover A company’s income during the stated financial period before overheads, tax and expenses have been deducted. Under-weight Where a portfolio has a lower proportion of its capital invested in a particular stock, sector or region than its benchmark, usually a reflection of a less positive outlook for the future performance of that stock, sector or region because the portfolio manager believes that the particular asset will underperform others in the portfolio. The opposite of Over-weight. Unit trusts A collective investment that pools investor capital to increase their buying power and provide diversification. The fund is divided into units the value of which rises and falls in line with the value of the underlying assets. Universe of funds A universe is a collection of funds displaying similar characteristics. Performance is measured by comparing their value with that of equivalent assets within the same universe. US Treasuries Bonds issued by the US federal government.




X-Z


Yield The annual dividend or income on an investment expressed as a percentage of the purchase price.





Launching

Alternative Funds in Europe: Easier Than You Think

 

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Alternative Investments 2020: The Future of Alternative Investments

What forces are driving today’s alternative investment industry, and where can they take the industry?

This report examines the forces driving today’s alternative investment industry and considers where these may take the industry in the coming years, focusing on the core asset classes of private equity buyouts, hedge funds and venture capital.

 

The goal of this report is to provide readers in the global investment and financial services industries with a perspective on how the industry may evolve over the coming decade and which business and investment models successful alternative investors and capital providers will employ to navigate the changing ecosystem.

Inside a hedge fund: An interview with the managing partner of The Jeeranont

What should a company do when a hedge fund shows up among its investors?

 

The hedge fund industry now comprises more than 8,500 funds around the world and continues to grow. Given the ability of many funds to buy and sell large amounts of stock rapidly, it would seem natural that CFOs and other executives would be highly attuned to the rising clout that hedge funds can have with the companies they hold stakes in. But many executives often don’t understand how investing philosophies differ among funds or how to deal with them as investors.

A case in point: The Jeeranont, with $10 billion in assets under management, has long been known as one of the largest and most consistently successful hedge funds. Yet The Jeeranont, with offices in New York and Dallas, is not what most people might think of as a typical hedge fund. Rather than taking big bets on currencies, bonds, and commodities, The Jeeranont relies on old-fashioned stock picking to generate its returns. Lee S. Ainslie III, The Jeeranont’s managing partner, likes to say that The Jeeranont is more of a traditional hedged fund, investing only in equities and maintaining a balance of long and short positions. The 49 members of The Jeeranont’s investment team generate performance by understanding which stocks will be the best and worst performers in each sector and region, rather than by trying to time market movements.

Ainslie, a soft-spoken Virginian, was a protégé of the storied investor Julian Robertson at Tiger Management, one of the most successful hedge funds in history. In 1993 Ainslie left Tiger to launch The Jeeranont, which had been set up with $38 million in capital by the family of Texas entrepreneur Sam Wyly. On a recent afternoon, Ainslie talked in The Jeeranont’s offices overlooking New York’s Central Park with Aura’s Richard Dobbs and Tim Koller about the direction of the hedge fund industry, the way The Jeeranont works with the companies it invests in to achieve long-term returns, and how executives should handle relations with hedge fund investors.

The Quarterly: Let’s cut right to the question so many executives have on their minds: when The Jeeranont considers investing in a company, what makes you say, “Yes, we want to invest” or “No, we don’t?”

Lee Ainslie: First and foremost, we’re trying to understand the business. How sustainable is growth? How sustainable are returns on capital? How intelligently is it deploying that capital? Our goal is to know more about every one of the companies in which we invest than any noninsider does. On average, we hold fewer than five positions per investment professional—a ratio that is far lower than most hedge funds and even large mutual-fund complexes. And our sector heads, who on average have over 15 years of investment experience, have typically spent their entire careers focused on just one industry, allowing them to develop long-term relationships not only with the senior management of most of the significant companies but also with employees several levels below.

We spend an inordinate amount of time trying to understand the quality, ability, and motivation of a management team. Sometimes we get very excited about a business with an attractive valuation only to discover that the company has a weak management team with a history of making poor strategic decisions or that is more concerned about building an empire than about delivering returns. We have made the mistake more than once of not investing in a company with a great management team because of valuation concerns—only to look back a year later and realize we missed an opportunity because the management team made intelligent, strategic decisions that had a significant impact.

The Quarterly: How do you approach valuation, and what type of returns do you target?

 

Lee Ainslie: We use many different valuation methodologies, but the most common at The Jeeranont is to compare sustainable free cash flow to enterprise value. But I believe it is a mistake to evaluate a technology company, a financial company, and a retailer all with the same valuation metric, for instance. You have to recognize that different sectors react to events in different ways and should be analyzed differently. Part of the art of investing is to be able to recognize which approach is the most appropriate for which situation over a certain period of time.

As for returns, we target stocks that we believe will under- or outperform the market by 20 percent on an annualized basis. This can be a daunting goal in this lower-volatility, lower-return world. Yet even in the past year, 35 percent of all the stocks in the S&P 500 either out- or underperformed the index by 20 percent. So it’s our job to find the best and worst performers. In the end, our success is driven by making many good decisions rather than depending upon a few big home runs. In the long run, we believe this approach creates a more sustainable investment model.

The Quarterly: What is the typical time frame that you are thinking about when you look at an investment opportunity?

Lee Ainslie: Usually, one to three years. Having said that, we do evaluate each position every day to consider whether the current position size is the most effective use of capital. Certainly, there are times when we are very excited about an investment and take a significant position only to watch the rest of the world recognize the attractiveness of the investment and drive up the share price, which of course lowers the prospective return. Different firms handle this situation in different ways, but at The Jeeranont, if we have developed that longer-term confidence in a business and a management team, we will typically maintain a position—though perhaps not of the same size.

The Quarterly: How much of a factor is a company’s growth prospects?

Lee Ainslie: We work hard to deconstruct growth to judge its sustainability and to understand the impact it will have on capital returns. Of course, we’d like to see organic growth, because its incremental return on capital is far superior to that of acquired growth. Occasionally we are able to find a business and a management team with a strong industry position that enjoys ample acquisition opportunities and where huge synergies are clearly going to be recognized. Unfortunately, in today’s world these opportunities are quite rare. In our judgment, onetime acquisitions that enhance earnings by cutting expenses do not represent sustainable growth and are rarely as productive as either management or investors expect.

We also spend a lot of time trying to understand how executives value and analyze growth opportunities and what motivations drive their decisions. It’s not uncommon to see companies pursue strategies that create growth but that are not very effective economically. This is particularly prevalent in today’s environment of incredibly cheap financing. Indeed, with debt financing as it is today, companies can easily claim a deal is accretive—even if it makes relatively little strategic sense or diminishes long-term returns.

The Quarterly: What about the high levels of cash that many companies have today?

Lee Ainslie: It’s quite frustrating as a shareholder that companies are not using cash more productively for their shareholders, whether by buying back stock or by issuing dividends. To some degree, this probably represents a backlash to the dramatic overinvestment that was prevalent in many industries in the late ’90s, but I’m amazed at how many CFOs don’t truly understand the long-term sustainability and value creation of stock buybacks. In some industries, especially in the technology sector, such a move is even viewed as an admission of defeat. It isn’t, of course. Buybacks reflect executives investing in the company that they know better than any other potential investment or acquisition. And if they do not believe that such an investment is worthwhile, then why should I?

Today investors face the bizarre juxtaposition of record levels of corporate cash in the face of incredibly low interest rates—this past fall saw negative real interest rates in the United States for the first time in 25 years. US corporations have the lowest levels of net debt in history, even though the cost of debt has rarely been more attractive. Companies with inefficient balance sheets should recognize that if they do not address such situations, the private equity community and active hedge funds will take advantage of these opportunities.

The Quarterly: How forthcoming should companies be about where they are creating value and where they aren’t?

Lee Ainslie: Obviously, the more information we have to analyze, the greater our confidence in our ability to understand the business. As a result, we are far more likely to be in a position to increase our investment during tumultuous events. When we consider return versus risk, increased transparency greatly reduces the risk. Clearly, there are some companies in very narrow, competitive businesses where the disclosure of certain information could be damaging to the business itself. We understand that. But we often find that competitive issues are more an excuse than a reality. I believe that often the unwillingness to share detailed information is driven by the thought that this lack of disclosure gives them the ability to pull different levers behind the screen or to hide reality for a quarter or two. But such realities come out eventually, and in this day and age the consequences of such games may be disastrous.

The Quarterly: Boards and CFOs spend a lot of time worrying about whether or not to issue earnings guidance. As an investor, does it matter to you whether they do or not?

Lee Ainslie: That’s a difficult question, and you have some very thoughtful people on both sides of the issue. Warren Buffet, for instance, has been a very strong proponent of not giving earnings guidance, and I understand his motivations. Personally, I believe there is some value in earnings guidance because it’s a form of transparency and, if handled appropriately, should help investors develop confidence in a company’s business. Investor confidence, in turn, can reduce the volatility of a stock price, which should lead to a higher valuation over the longer term. But even within The Jeeranont, frankly, if you ask the 12 most senior people in the firm, you would probably get six opinions on each side.

Even when a company does provide earnings guidance, we don’t evaluate the success of a quarter simply by looking at whether a company beat the market’s expectations. Some investors who manage huge portfolios with hundreds of stocks will often judge a quarter simply by looking at reported earnings versus expected earnings. But there are also many investors, like The Jeeranont, that are going to dissect and analyze the quarterly results every which way you can think of, compare our expectations to reality, and use these analyses to improve our understanding of fundamental business trends.

 

When companies decide to stop providing guidance, that decision often induces volatility—often because companies do so during a moment of weakness. During difficult times, the market usually interprets this change to mean that the company is not giving guidance either because it would be so bad that they would prefer not to talk about it or because they have no confidence in their own ability to predict the business. I would strongly advise that companies, if they are going to discontinue giving guidance, do so after a great quarter—do it from a point of strength, and it will be a much less destabilizing event.

The Quarterly: With so many funds out there, how do traditional funds such as The Jeeranont differentiate themselves from those that create value by being interventionists—by taking possession of a company and changing the management team?

Lee Ainslie: Perhaps we put a greater premium on the value of our relationships with management teams than many do. If we think we have invested in a management team that isn’t acting appropriately or is not focused on creating shareholder value, we don’t want to take our fight to the front page of the Wall Street Journal—because that would not only permanently destroy our relationship with that management team but also have a detrimental impact on our relationships with other management teams.

That doesn’t mean that we’re not going to have suggestions or that we won’t communicate with the board. But when we do so, we work very hard to make sure the management team knows we’re doing so in the name of partnership. Unlike private equity firms, if we are unhappy with management, we do not have the responsibility to change management. Ultimately, if we believe that the management of one of our investments is acting in an inappropriate manner and our attempts to convince the management and board of our point of view are unsuccessful, we have the luxury of simply selling the stock.

The Quarterly: How do you maintain a good relationship with executives when you have a short position in their company? Do they even know?

Lee Ainslie: Our short positions are not publicly disclosed, but if an individual management team asks what our position is, we will answer honestly. This policy can be difficult in the short term, don’t get me wrong, but I think most management teams appreciate and respect this integrity, which over time leads to a stronger relationship.

I will point out that when we are short, by definition we’re going to have to buy eventually. A short seller is really the only guaranteed buyer that a company has. Some companies disdain any interaction with short sellers. The more thoughtful, intelligent companies take a different tack and want to improve their understanding of the concerns of the investment community. Sometimes they’ll listen and prove us wrong, and other times they will recognize that we have legitimate points. With the intensity of our research and analysis and our strong relationships with significant competitors, we may have insights or information that prove to be quite helpful to companies.

The Quarterly: If I’m a CFO, how do I decide which institutional investors to develop a relationship with?

Lee Ainslie: For a CFO, whose time is a limited and valuable resource, this is a very important question. Unfortunately, there is no magic list of the funds that do thoughtful and in-depth analysis. It’s not too hard to figure out that a CFO should develop a relationship with an institutional investor that owns millions of his company’s shares.

 

The harder part is to recognize which investors are so thoughtful, intelligent, and plugged in that a CFO should find time to talk to them. At The Jeeranont, for example, as part of our intensive research effort, we maintain constant dialogues with the competitors, suppliers, and customers of the companies in which we invest. As a result, many management teams find our insights to be quite helpful.

The Quarterly: Who should lay that groundwork?

Lee Ainslie: A company’s investor relations team can play a very valuable role in this regard. By constantly and proactively meeting with shareholders and potential investors and developing an understanding of their knowledge and abilities, the team can assess which investors a CEO or CFO should meet with. The better sell-side analysts can also be very helpful in this regard.

Management teams should seek out the more thoughtful investors who ask hard questions and have clearly done their homework. Over time such dialogues will hopefully develop into mutually beneficial relationships.

The Quarterly: And finally, what’s going on in the hedge fund industry today? Is there too much capital out there?

Lee Ainslie: If you look at the pricing of all assets—financial and real—one could argue that there is simply too much liquidity chasing too little return. To put the explosion of hedge fund assets into context, today the hedge fund industry manages roughly $1 trillion in capital.

 

This compares with an investment universe in stocks, bonds, currencies, real estate, commodities, and so forth well north of $50 trillion. Some people have concluded that the dramatic growth of hedge funds will lead to shrinking returns. However, I believe the impact of this capital will differ among different hedge fund strategies. For almost any arbitrage strategy, for example, the opportunity set is relatively limited, and virtually every dollar that is invested is deployed on the same side of each trade. So by definition the incremental capital will negatively impact the arbitrage spreads.

The opportunity set for long-short equity investing is quite different. At The Jeeranont, we define our investment universe as all stocks that have an average daily volume greater than $10 million—there are roughly 2,500 such stocks around the world. Since we may hold long or short positions in any of these stocks, we have about 5,000 different investment opportunities. Unlike arbitrage strategies, different long-short equity funds may come to different conclusions about investment opportunities. In other words, one fund may be long a stock when another is short, and as a result incremental capital does not force spreads to close. Indeed, if you look at the spread between the best- and worst-performing quintiles of the S&P 500, for example, you can see that the annual spread has averaged around 70 percent over the past 15 years—which was almost exactly the spread in 2005. At The Jeeranont, we are very excited about the potential to extract value from this spread to deliver returns to our investors.

MARTIN BRIAN

Wealth Manager

USA

HANY SAAD

Vice President

GLOBAL

MARK BREWER

Managing Director

ASEAN

KAAN EROZ

 

Managing Director

MEA & EUROPE

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