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Investors sweeten on hedge funds as rates climb

Sarah Jones
Australian Financial Review
Sep 11, 2023

After a decade of easy money pushing equity markets in one direction, Wall Street hedge fund manager Ricky Sandler says the return of volatility and higher interest rates is seeing money return to long-short strategies.

The founder and chief investment officer of Eminence Capital flew out to meet prospective clients in Sydney and Melbourne last week and said that wealth platforms and family offices were most interested in his $US2.6 billion ($4.1 billion) flagship long-short equity fund. The firm also manages a $US4.1 billion global long-only equity strategy.

Eminence Capital’s Ricky Sandler (right) with Barrenjoey co-executive chairman Matthew Grounds. Sohn Hearts & Minds is now in its eighth year. Peter Rae

“We’ve had a much better reception for a hedge fund than I expected,” Mr Sandler said in an interview with The Australian Financial Review. “That tells me that they want both sides – they want long, shorts, and they want active management.

“Higher rates are good for our strategy. The low rate speculative environment was tough for disciplined people who short, so for what we do, this is a good environment.”

Data from Hedge Fund Research showed industry assets rose for a third consecutive quarter in the three months to June 30 as investors allocated money to equity hedge fund and event-driven strategies. Total global hedge fund capital stands at an estimated $US3.95 trillion.

Mr Sandler, who is due to return to Sydney in November for the eighth Sohn Hearts & Minds Conference, said while he was not expecting a deep downturn like during the global financial crisis, “we are not about to take off into a new bull market either”.

It would be too simplistic to say we are headed for a mild recession, but within the nuance of that, I would say it’s a reasonable proposition [to expect a contraction].

“We have been running a bit more conservative on our net exposure than average. Typically, we run about 45 per cent net, but this year we have probably run between 35 and 40 per cent. It’s not extreme, but we do think it’s a wonderful stock-picking environment.”

A hedge fund’s net exposure is the difference between short and long positions expressed as a percentage.

“A lot of investors when they’re worried about markets, they take their gross exposure down ... but we think you can make a lot of bets between long and shorts here.”

While Mr Sandler doesn’t hold any long positions in Australia – in part due to the fund’s avoidance of mining, energy, banks and insurers – he does hold some short positions, which he declined to name. His team likes the technology-media-telecoms, consumer and healthcare sectors.

In the last 12 months the fund’s most successful bets include web tracking and analytics company New Relic, which was also the hedge fund manager’s stock pick at last year’s Sohn conference in Hobart. The stock has since climbed around 70 per cent.

Of the so-called Magnificent Seven large cap tech stocks that helped drive the benchmark S&P 500 into a bull market earlier this year, Eminence Capital owned Amazon.

It also briefly held a position in Facebook owner Meta after the stock slumped below $US90 in October. It got out when the stock hit $US200 around March; Meta closed on Friday at $US298. Other long positions include Uber, which has jumped 45 per cent over the past 12 months,, Zillow and Vertiv.

Along with Eminence Capital, other New York hedge fund managers making an appearance at Sohn include Azora Capital’s Ravi Chopra, and Angela Aldrich, founder and managing partner of Bayberry Capital Partners.

Since the launch of the Sohn conference in Australia in 2016, $60 million has been raised for medical research.

The Sohn Hearts & Minds Investment Leaders Conference is held November 17 in Sydney.

This article was originally posted by the AFR here.

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