Hedge Fund Research reports that 530 hedge funds folded their tents in the first half of 2016, and only 406 launched, putting the industry on pace for the second-largest number of fund liquidations since 1996, and fewest number of new funds launched since 2009. So new managers have to beat worsening odds, and in addition to staying on top of their strategies, they must attract investors, understand an increasingly complex regulatory and compliance environment, and establish a business infrastructure. If they can set up a sustainable business, they then need to know when they have the right mix of assets and investors to maximise their strategy – often the most difficult thing for a rapidly growing fund.
The recent numbers are stark. By the end of 2016, the HFRI Fund Weighted Composite Index showed hedge funds up 3.46 percent year-to-date and trailing the S&P 500 by more than half. Hedge fund withdrawals reached $15.1B in the first quarter of 2016, according to Hedge Fund Research, an industry research firm. That’s the largest total since 2009.
Joseph Di Virgilio: hedge fund manager
Today we are going to talk with Joseph Di Virgilio a fund manager and market strategist with L/S skills in domestic and foreign markets (US, Europe, Japan, Ems), trying to better understand how a hedge fund works. He has ranked Top 10 best performing L/S equity manager based on 3 year risk adjusted annualised returns of +20% in a universe of 8000 funds globally – (Bloomberg – 08/2014). Currently, he is the CIO of Romulus Asset Management LLC, a NYC based investment fund advisor specialising in Macro, Energy, Water, Food/Agriculture, Chemicals, Infrastructure, Materials and Industrial segments.
Previously, he has been Chief Equity Strategist for JME Asset Management, an alternative IM with a Natural Resources & Energy focus where he was responsible for obtaining institutional seed capital and building/managing the firm’s equity business.
Prior, Di Virgilio was VP of Deutsche Bank’s Global Power & Utility Investment Banking Group where he participated in transactions ranging from IPOs/M&A, private equity, advisory & corporate client acquisition. Joseph Di Virgilio is a financial and economics contributor for the Huffington Post Italy.
CGMM: Let’s cut right to the question so many readers have on their minds: when RAM considers investing in a company, what makes you say, “Yes, we want to invest” or “No, we don’t?”
JOSEPH DI VIRGILIO: Every investment management firm wants to be “different” in its investment strategy and methodology. Many achieve this with creativity and innovation, all traits that come with many years of experience. New technology has also played a pivotal role in the development of predictive algorithms, transactional platforms and liquidity. We are a thematic firm; hence we only look at companies that fall within our mandate, which is tied to those sectors directly impacted by the exponential growth of the earth’s population, and for this reason we are global and invest in Water, Food, Energy, Infrastructure, Materials, Clean Tech, Renewables and Industrials. In short, all sectors that fall within the “Sustainability” theme. For this reason, we encompass multiple processes in our methodology, as we have many drivers at play simultaneously. The main ones are; bottom-up (fundamental stock analysis) and top-down (country screening/macro). In addition, we use qualitative, legislative research as well as quantitative and technical analysis. Once a company has gone through a rigorous due diligence process and it’s a candidate for investment, we assign it a score (1-5) via a proprietary matrix. The higher the number the higher are the chances the company will end up as a constituent of the fund. This of course, depending on the needs for such company in the fund at that time.
CGMM: How do you approach valuation, and what type of returns do you target?
JOSEPH DI VIRGILIO: We approach valuation in many ways, and depending on the economic cycle and in what part of the world we are looking, we take into consideration different metrics, such as P/S and P/E ratios, discounted cash flow, earnings growth, competitive advantage etc. We target approx.15% annual returns net of fees.
CGMM: What is the typical time frame that you are thinking about when you look at an investment opportunity?
JOSEPH DI VIRGILIO: We target companies for the long term but it’s not as easy as it once was. Markets evolve, so we need to be innovative in our risk management approach. This is the most important aspect of our job. For this, we aim at 8-12 months (ideally longer) but are very aware that things may change much sooner. This is why we have a short component of the fund. We typically short stocks to offset our long exposure, and for additional alpha when we find the right opportunity. But being well balanced between long and short is the key to good returns if the stocks on both sides have been carefully selected.
CGMM: How much of a factor is a company’s growth prospects?
JOSEPH DI VIRGILIO: Very important and that’s the very reason why we shy away from investing in companies with a market cap bigger than $50Billion unless there is a clear catalyst for investment. By the same token we do not invest in companies that are smaller than $2 Billion.
CGMM: What’s going on in the hedge fund industry today? Is there too much capital out there?
JOSEPH DI VIRGILIO: Capital is leaving the hedge fund industry and only the best managers will survive. The ETF market has been taking over. But I reject the argument of those who compare hedge funds fees to long only products. With long only products you are at the mercy of all risks. While hedge funds are also short and can better mitigate certain risks.
President Donald Trump’s plans to overhaul the U.S. tax system and increase infrastructure spending should accelerate growth in the world’s biggest economy over the next two years. Uncertainty about the scope of Donald Trump’s fiscal and trade policy will keep the Federal Reserve strictly focused on creating full employment and getting U.S. inflation near 2%, Fed Vice Chair Stanley Fischer said.
CGMM: That said, how do you think Trump will succeed implementing his fiscal expansive policy and how FED’s political choices are related to the new Trump’s goals?
JOSEPH DI VIRGILIO: I am not a fan of Trump and I believe that much of what he promised will be a “no-deal”. He has contrast with members of his own political party and it will not be such a walk in the park for him. I am skeptical he can get half of what he promised approved. Infrastructure spending has been every president’s promise but it always ends up with deploying the cash to the defence department instead. We are in different times and it is very hard to understand what Trump really wants as he is very contradictory in his statements. So we are on a stand-by mode till we get more clarity on his agenda.