UK sector neutrality is hard to maintain in current market conditions as most sectors are heavily co...
UK sector neutrality is hard to maintain in current market conditions as most sectors are heavily correlated limiting long/short stock opportunities.
Philip Hardy, manager of the Polar Capital UK market neutral fund launched in mid-November, said he has eased off shorting purely to hedge a long position in a particular sector as it was becoming expensive.
While the fund remains 60% neutral, sectors such as mining and telecoms are harder to short as all the stocks they contain show a high degree of correlation.
This is in spite of the fact that as Hardy said, not all the stocks offer the same potential. In the telecommunications sector, he said he preferred mmO2 to Cable & Wireless but both have fallen by similar amounts, despite the fact that he believes mmO2 offers greater growth potential. In mining, both Biliton and Rio are advancing at similar pace.
He said: 'Long has better potential right now. If I have a good long idea the issue right now is how do I hedge it. It is difficult to try and find another stock in that sector that will disappoint because of the high correlation. Being sector neutral has not been particularly helpful so I've eased up on this slightly.
Some stocks he has been favouring include Sage, Kingfisher and Woolworths. He believes the market has treated Sage unfairly and noted it is now trading reasonably well. Woolworths he favours as a recovery story, pointing out it is trading at a significant discount following disappointing Christmas sales.
Hardy holds no more than 5% in any one holding at purchase and has recently lowered the number of holdings to closer to 40-45 from the 56 he held at one stage. Gross asset exposure since launch has been between 50% and 110% and he has been neutral in terms of net exposure, although at one stage this did rise to 12%. The fund has significant exposure to the large cap market, although Hardy added in the long-term there will be a bias towards larger mid cap stocks as he believes that is where value can be added to the portfolio. The fund is at $8m and will close at $400m.
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