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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