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.
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!
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.”
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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.
YTD the Varus Fund is up close to our 15 per cent net annual performance target, taking into account 650bps hedging losses with a volatility of 6 per cent and 0.2 correlation against the leading indices.
Our core book contributed plus 392bps with a good performance of SGL Carbon (plus 121bps) and Gildemeister (plus 126bps). SGL will remain a core holding as the steel recovery will strongly benefit two of the three divisions over the coming months. We believe carbon is the future in the automotive industry and the free option for every SGL investor towards EUR 40 fair value. Our trading book realized a performance of plus 202bps with stocks from the Automotive, Industrial and Retail sectors. We met Michelin and Faurecia management teams several times this year at their headquarters and both will remain core holdings in our fund. The tire replacement cycle will come in 2014 for Europe and China while the European consumer confidence index indicates already a recovery in demand for auto and tire sales. Our Hedging Book generated a loss of minus 34bps.
Continuing inflows into Europe reached a four year high, improving economic data has helped peripheral Europe seeing the largest inflows since 2009. Continuation of European recovery has become more visible hence cyclical companies continued their outperformance where we started to invest back in March. PMI new orders continue to improve while the ECB could surprise on policy (a rate cut or another LTRO) and European multiples have the potential to move from 13x back towards 11x in 2014 with 20-30 per cent EPS growth post 25 months of European earnings downward revisions.
We are rightly positioned and have a good workflow of investment ideas for the next quarters with the actual business dynamic in place in Europe.