manager believes there is a lot to be gained by running focus and hedge funds side by side
Gartmore's Ashley Willing may have his work cut out for him in running the UK Focus fund as well as a long/short hedge fund, but the manager claims the two portfolios complement each other perfectly.
'Running them alongside each other leads to synergies and the potential to enhance performance for both products,' he said.
Hedge and focus funds are similar in that they both aim for consistency of returns. Both have high turnover, a disciplined approach and intensive management style, Willing added. He said having a short side in the hedge fund means he is constantly looking at stocks where he has a negative view. Therefore, he is ideally positioned to notice a change in fortunes.
'Long-only managers tend to focus on stocks they like, rather than those they don't like. But by managing the hedge fund and closing short positions, this creates opportunities in the long-only fund,' he said.
'A short position is closed because it is no longer over-valued, the expected negative event has occurred or something has changed. Therefore closing a short position can lead to the early identification of a long position. It is usually in the early days of a turnaround position that the best gains are to be made.'
Such a turnaround can be demonstrated by Boots. This was originally held as a short position in the hedge fund as its franchise was eroding due to competition from supermarkets, poor investments, difficult trading conditions and poorly regarded management.
However, Willing closed the short position on Boots, went long in the hedge fund and bought it for the long-only fund earlier this year when he saw that the trading and franchise problems were being fully reflected in the valuation. In addition there was a management change, which led to a shift in strategy. The result was a sharp rebound in the share price and Willing was invested from the start.
Likewise, because of the short side in hedge funds, early and specific identification of tomorrow's losers should reduce the number of stocks that will hurt most in long-only funds.
'This is a process that reduces passengers and reduces disasters, which in a concentrated aggressive 25-35 stock fund like UK Focus, you simply cannot afford to have,' he said.
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