Andrew Holland, CEO, Avendus Capital Alternate Strategies, has been managing the Absolute Return Strategy since 2006. Pioneers in the long-short strategy in equity stocks, the team has built a sizable fund—₹ 4,400 crore—since April 2017 after starting at Avendus. Holland explains the popularity of the product, and the risks
The assets gathered ballooned to around ₹ 4,400 crore in a short one-and-a-half years with Avendus as opposed to around ₹ 1,200-1,300 crore in three years with Ambit Capital. What changed? (The same team ran the strategy with Ambit Capital before they moved to Avendus.)
In the first 2-3 years at Ambit, we did a lot of education in terms of meeting clients so they would understand the fund better. DSP and Edelweiss also came in with their products, which helped expand the market and awareness. Interest rates have come down as well. The product is positioned as debt allocation rather than equity. The aim is to give 15-20% gross return year after year regardless of the market condition. For our fund, volatility is at 5-6%, which matches a debt fund as opposed to around 15-16% volatility in the Nifty 50. So, it is a debt-plus type of risk with equity-type returns. After tax and fees you can make 8.5-10.5% as against 6-7% in a gilt fund. Plus, there is liquidity. Another part is that we have lost money only in two periods, March and July 2014.
Why the pause in inflows? Too much too fast?
In October last year, we got ₹ 1,300 crore. We are quite conservative and want to be able to deliver returns rather than chase assets. So, we paused and again opened in April and again got Rs1,300 crore. The other real reason is that under Sebi rules you can only have 1,000 investors and we are kind of knocking on that door.
Could you have a similar strategy in another fund or is scalability limited?
Liquidity in the futures market is not a concern. If we launch a similar fund, it causes a conflict—which order shall I put in first? I am not saying we can’t do that, but we want to think about it. We are also keeping some capacity; later this year we want to launch this strategy offshore. We might raise up to, say, $500 million there, therefore we want to keep some capacity for this offshore fund.
The short strategy for the fund is more for hedging rather than excess return by taking aggressive positions. Technically, the structure allows you to have aggressive shorts, why not apply that more?
In a developed market, a hedge fund can say that one stock is going up and another is going down. You can’t do that here. You get squeezed a lot on the short side; markets just do a rotation. There is no reason for that to happen, but it does. The market is not mature enough yet. So, it is more about hedging rather than making money from the shorts.
There are three things we do to manage risk. We protect capital first and then make the 15-20% return objective. In 2016, when China depreciated its currency, there was an expectation that it was going to do a lot more; oil price was volatile; and our market opened gap up or gap down depending on where the oil price was. You can’t operate well in such times; we took the fund to 93% cash to protect capital. Since we are not comparing performance relative to anything, it doesn’t matter so long as we deliver the return objective for the year. We don’t take in event risk and bring the portfolio to cash ahead of an event. The final thing we do, which no one else does, is a minimum hedge of 30%. On the short side, we identify companies that are likely to underperform due to either global or local factors. Here, no holding is more than 2-2.5%. That tells you I am hedging.
In the worst-case scenario, if both the long and short side risks come true, how quickly can you change position?
Last October, we were long on private banks and short on PSU banks. Then overnight the announcement on recapitalisation came and we walked into gap-up on our shorts. One of our risk limits is that if the stock moves 15% up, we must exit. In the morning, we got out of all the PSU stocks rather than wait and watch. On the long side, we decided the reaction was knee-jerk and the fundamentals hadn’t changed. We lost about 20 basis points in a day taking a ‘great’ performance month to an ‘okay’ month.
We lost more money on the long side than on the short because we only had 1-2% per share on the short side. That is what happened, when basically the worst case came true. It happens, but we are very quick to change.
You have launched a new fund, which is more inclined towards being long equity. Why now in such a volatile market?
We wanted to launch this back in Ambit but it didn’t happen. This fund is equity-plus in terms of returns and equity-minus in terms of risk. With 70% of the inflow we plan to build a long equity portfolio, and the 30% will be used for a long short strategy. The objective is to return one-and-a-half times Nifty over a three-year period. But we also want to limit the downside. If the market falls 10%, we want to limit the portfolio to a downside of 3%. There can be three different scenarios—when markets are falling, are range bound or are going up. On the downside, we will use up the 30% to hedge to limit downside. If it is range bound, we will do a long short strategy similar to the absolute return fund. And if the markets are going up, we plan to use some leverage on the 30% and get up to 130% long portfolio. That’s how we plan to get enhanced returns.
What’s unique about this to my mind is that the core equal weighted portfolio of 15-20 companies is fixed, but the 30% is highly flexible. This is equity now and will get compared to the Nifty 50.
Lisa Pallavi Barbora