Varus Fund's Blog
Varus Fund continued the positive start into 2014

This quarter, the fund strongly outperformed both the German and European equity indices (+6.28% above the Dax index and +5.31% above the Eurostoxx 50) and the HFRX Equity Hedge Index (+4.83% above the Index). The fund is using the current volatility to invest in the trading book for stronger Q1 results where we see for the first time in two years the potential for positive earnings revisions. The new IFRS DRS 19/20 accounting standards forcing German companies to guide slow at the start of the new year.

March was another tricky month where one could have made many mistakes. The fund has scaled back into investments which we sold during January and February 2014 using the sell off by 6-8% in the German stock market during March.

The fund has invested into two new core positions Metro AG (German consumption which was in the portfolio last year, now again 35% lower) and Sulzer (Swiss oil and gas machinery). Sulzer’s multiples are 20-50 per cent below Metso/Weir/Alstom merger/sale multiples. Metro is a perfect private equity investment where one could break up the company into parts achieving much higher takeout vs the current conglomerate structure. German consumers are strong like the real estate market. The drives behind like the Spanish or Chinese real estate boom point to the fact that Germans will soon start to consume much more which, in turn, from the  rise in real estate assets.

The funds focus remains aligned with our five investment themes:

1. Companies where we see rising earnings post heavy restructuring and debt refinancing.

2. The increase of capex spending returning to Europe. Positive momentum for the cyclical sector.

3. M&A activities in Europe (recent merger of Holcim and Lafarge, Rautaruuki and SSAB, Continental’s acquisition) & further increase of IPO volumes.

4. Reversal of the downside trend in earnings revision into a positive trend.

5. A continuation of inflows of institutional asset allocators to European Equities.

RETURNS IN BRIEF 04.04.2014

RETURNS IN BRIEF

The Varus Fund, a Germany-focused long-short equity fund, is up an estimated 1 percent in March to bring year-to-date returns to 6.3 percent, according to a performance report obtained by Bloomberg News. Contributors to the performance included long positions in specialty chemical maker Lanxess AG and retailer Distribuidora Internacional de Alimentacion SA, co-founder and portfolio adviser Stefan Heieck, said by e-mail. The fund has invested in retailer Metro AG, a “new core position”, according to Heieck. “Metro is a perfect private equity investment where one could break up the company into parts achieving much higher takeout versus the current conglomerate structure,” he said. Another “core” position is machinery and equipment manufacturer Sulzer AG. The fund, run by Zurich-based Heieck Siebrecht Capital Advisors, launched in September 2009 and

is managed by Heieck and co-founder Frank Siebrecht.

— Darshini Shah

Varus Fund continued the positive start into 2014

Varus Fund continued the positive start into 2014 (average net exposure of 39.2% and gross  exposure of 41.8%). The fund decreased the net exposure from 49.5% to 34.3% from realizing profits during February 2014 and in anticipation of a potential higher volatility in March 2014. Industry levels are still too high for European long/short funds with 54% net and 178% gross, which we have seen being corrected during March 2014 where funds reduced their positions and VAR pre the Crimea ruling past Sunday. The fund is using the current volatility to invest in the trading book for stronger Q1 results where we see for the first time in two years the potential for positive earnings revisions. The new IFRS DRS 19/20 accounting standards forcing German companies to guide slow at the start of the new year.

This year, volatility has increased already twice by nearly 40% (EMEA and Crimea conflict) and we expect continued volatility going forward.   From 2009 to 2011, part of the fund performance directly came from the higher volatility environment which is positive for our trading book.

This month, our trading book contributed plus 132bps with directional longs and shorts. Aixtron, plus 63bps, in which we began to build a position during November and December 2013, as part of our first theme “companies where we see rising earnings post heavy restructuring and debt refinancing”, is a good example of a trading position. We scaled out of the position by 2/3 during a 30% increase in the share value post their capital increase in Q4 2013. We believe OLED and lighting will be a core consumer trend in 2014 and going forward. The core book realised a profit of 151bps in February. The two main contributors are Rheinmetall generating plus 45bps and Lanxess plus 87bps. We completely realized our profits in Rheinmetall post their strong performance of plus 38% since mid of December 2013. Please let us know if you want to receive our Rheinmetall investment report. The fund has started to invest into two new core positions and is currently scaling back into investments which we sold during January and Februay 2014 using the current opportunity of the sell off by 6-8% in the German stock market during March 2014.

The funds focus remains aligned with our five investment themes:

1. Companies where we see rising earnings post heavy restructuring and debt refinancing - the lean ones who restructured will benefit the most in a top line increase in 2014.

2. The increase of capex spending returning to Europe. Positive momentum for the cyclical sector.

3. M&A activities in Europe (recent merger of Rautaruuki and SSAB & Continental’s acquisition) & further increase of IPO volumes.

4. Reversal of the downside trend in earnings revision into a positive trend.

5. A continuation of inflows of institutional asset allocators to European Equities.

Varus Fund strong start into 2014

Stefan Heieck: “January European long/short hedge fund performance is directly linked to the European top longs performance which was down 4.3 per cent . With around 60 per cent of the numbers for January so far reported to the EuroHedge database, the EuroHedge Composite Index is showing a fairly flat return of some 0.08 per cent.

As I highlighted in November and December Varus Fund is not invested in these crowded longs. Concentration and crowding of positions is very dangerous with a sudden rise of volatility as the positioning was at multi year highs going into the new investment year 2014. Thinking different helped the fund to achieve a plus 90pc percentile during the 40 per cent volatility increase and sell off in January 2014.

The same investment strategy was applied for February so far where we have seen CTAs and other market participants to decrease their market and index exposure to the lowest level since 2012. CTAs were selling the most index exposure for the past 12 months while at the same time the market bottomed out. I decided to reduce our overall investments towards 7 by the end of January and no risk hedges as the risk/reward was very good. This investment decision together with scaling back into several investments led to another strong performance with plus 304 bps MTD. The top performing investment MTD is Lanxess - as highlighted in December chemical stocks are the biggest non-consensus long in the market. BASF, AkzoNobel, Clariant and Lanxess have left their sideward trend and have been the top performing stocks in February overall followed by the material sector. Beside Thyssen (very strong FY reporting today) and Rheinmetall we remain very confident that Lanxess is trading on a 25 per cent discount vs fair value.”

Please do not hesitate to contact us and arrange a conference call and direct discussion about the fund’s current positioning and performance.

Risk Management focus - cut of net exposure by 50 per cent:

 Varus Fund reduced the net exposure from 66 per cent (end of October) to 31 per cent by end of November (six month average at 54 per cent) in anticipation of more volatility. The Hedging book was down in November while building up several new hedging positions where the fund was able to benefit in December.

The top five investments of the fund this month have been again contrarian investments where we believe the risk/reward is very good. These investments are contrarian to many crowded positions in the market (high risk / 52 week highs) and offer much higher upside for the coming months vs. a moderate downside.

As highlighted over the past months the fund is invested in cyclical companies and currently invests into new investments for 2014. The new investments focusing on our five main themes for 2014:
1. Companies where we see rising earnings post heavy restructuring and debt refinancing - the lean ones who restructured will benefit the most in a top line increase in 2014.
2. The increase of capex spending returning to Europe (CS survey shows a positive balance of European companies expecting to raise spending versus those cutting it. A net balance of +16 per cent compares with -26 per cent a year ago). Positive momentum for the cyclical sector.
3. M&A activities in Europe & further increase of IPO volumes (doubled this year vs. last year so far only driven by mostly Private Equity transactions vs. no real established industrial firms). The transaction of Merck KGaA and AZ Electronics confirmed the start of this theme.
4. Reversal of the downside trend in earnings revision into a positive trend.
5. A continuation of inflows of institutional asset allocators to European Equities.

We would like to thank all of our investors and partners for their continued support, and we look forward to an even better 2014.
We wish you a Merry Christmas!

October 2013, EuroHedge article - HSCA rebounds with Varus German-centric long/short equity fund

The Varus Fund, a long/short European equity strategy managed from Zürich by Heieck Siebrecht Capital Advisors (HSCA), is rebounding well this year after posting its first annual loss in 2012. 

Varus places an emphasis on investment in German-speaking Europe, but also invests in companies in the UK, Benelux, France, Italy and the Nordics. The portfolio typically holds around 30 positions, and comprises three separate books: a concentrated core book of high-conviction long and short positions; a trading book focused on catalyst-driven longs and shorts; and an actively managed risk-hedging book to balance exposure.

Launched in September 2009, the fund draws directly on the career experience of its co-managers, Stefan Heieck and Frank Siebrecht, who previously ran Absolute Capital Management’s Germany-focused fund.

The duo take a classic approach to running a bottom-up equity hedge fund, relying on in-depth research and direct contact with company management in order to assess the fundamentals and develop a view on each of the companies in their universe.

The fund started out extremely well, returning 19.57% in 2010 when the EuroHedge European Equity index was up just 6.44%, and it made 20.67% in 2011 against a loss of 3.63% for the index. But Varus was wrong-footed in 2012 and posted a loss of 13.74% for the year, compared with a 6.28% gain for the index.

The fund is bouncing back this year, however, and has made 13.34% to the end of September — compared with an index return of 7.70%.

The Varus track record is evidence of the fund’s lack of correlation to its peers and to the markets, says Heieck. He attributes last year’s losses to a disparity between HSCA’s company research and the behaviour of other equity investors. “Last year, we saw that the fundamentals were not improving, but the market kept going and didn’t react to this,” he explains.

Heieck and Siebrecht called the markets far better this year, investing heavily into European cyclical companies from March onwards in order to position the fund for a recovery. Having been running the fund with relatively low levels of  exposure, the managers raised the gross from an average of 44.5% in February to 167% in June, as they built core positions and added to the hedging book.

The last three months have started to see this repositioning pay off, with gains of 5.78% in July, 2.11% in August and 5.60% in September. “We don’t believe this recovery is over yet — we’re maybe halfway through,” says Heieck. “We deliberately increased our exposure because we’re always trying to think about what is going to happen in the next six to 12 months.”

Significant money-makers for the fund in recent months have included steel company Thyssen, retailer Metro Group, chemicals company Lanxess, mechanical engineering firm Gildemeister, brick manufacturer Wienenberger, implant and prosthetics company Nobel Biocare, and auto-related names Peugeot, Michelin and Faurecia.

HSCA is expecting a mixed third quarter for European companies, but with relatively strong outlook statements to come for Q1 2014. The managers would like to see a little more volatility come back into the markets, as their trading style often involves taking profits and then buying back into the stock at a lower price — effectively making that money all over again.

Having launched with $4 million, Varus was running $28 million in September 2011 when a flurry of inflows — including a seed investment from Paris-based NewAlpha Asset Management — took assets to around the $100 million mark.

Sadly, performance last year meant that the figure has slipped to around $65 million. “Some investors came in at the peak and left at the low,” observes Heieck, “which makes the argument that if you invest in a hedge fund you should really stay in for a substantial amount of time. But some investors are already forgetting 2008, and that’s very dangerous.”

HSCA is currently targeting a range of investors including funds of funds, family offices, banks and independent investment managers. The firm has an initial capacity target for the strategy of $250-300 million.

Heieck believes it is important as a hedge fund manager to stand out from the pack. “We are designed to take risks, not to track the market or be market neutral,” he says. “I’m still a believer that you need to be uncorrelated to be a successful long/short equity fund, and you have to dare to be different.”

Disclaimer: This publication is for information purposes only. It is not investment advice and any mention of a fund is in no way an offer to sell or a solicitation to buy the fund. Any information in this publication should not be the basis for an investment decision. EuroHedge does not guarantee and takes no responsibility for the accuracy of the information or the statistics contained in this document. Subscribers should not circulate this publication to members of the public, as sales of the products mentioned may not be eligible or suitable for general sale in some countries. Copyright in this document is owned by HedgeFund Intelligence Limited and any unauthorised copying, distribution, selling or lending of this document is prohibited.

16 October 2013, HFM Week - Exclusive: Varus rebounds on European cyclical names

by Elana Margulies- 16 October, 2013

Keywords:L/S EquityEurope,

Varus Capital Management, a Zurich-based long/short equity manager, has generated a 13.3% return so far this year following a double-digit loss in 2012 thanks to surging European cyclical stocks, HFMWeek has learned.


The $70m manager, which recorded a 13.8% loss last year, has seen performance soar in the year through September after contrarian bets paid off.


Stefan Heieck, managing member, told HFMWeek that its exposure to a handful of investments namely in the steel and industrial sectors – including companies such as Thyssen, Gildemeister and SGL Carbon – have contributed to gains during the first three quarters of the year.


“Most European cyclicals we invested were contrarian investments as the European market was still long defensive and high-dividend stocks,” he said.


Heieck said Thyssen had been trading at 5x EBITDA when Varus began investing in March while an investment in undervalued Gildemeister had paid off following strong order intakes since the end of the first quarter.

Source:https://www.hfmweek.com/news/2013/10/exclusive-varus-rebounds-on-european-cyclical-names