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fund profile Teamwork and robust trading help fund in chaotic market Naming a company after a Native American tribe may seem to some a bit eccentric, but to William ‘Bill’ Harnisch, chief investment strategist at Peconic Partners, it seemed the perfect solution. The name, he says comes from a tribe resident in east Long Island, described as a wealthy tribe. “I thought it would be nice for a hedge fund. In fact one of our two disaster recovery centres is actually in east Long Island,” Harnisch says. Harnisch manages all aspects of the company’s investment process. Harnisch began his career at Chase Manhattan Bank in 1968. He joined Forstmann-Leff Associates in 1978 when the business managed $300 million. He began managing that company in 1984 and became a majority shareholder in 1989. With a strong history in absolute return, Forstmann-Leff entered the hedge fund business in 1990, eventually growing assets to over $5 billion. The long-only business was sold in 1997 and Harnisch left at the end of 2004 to concentrate on the hedged product now known as Peconic Partners, founded in 2000. The company now has $1.5 billion in assets under management (AUM) in a variety of accounts allocated into funds. Long/short equity accounts for the bulk of business. Harnisch has set up a system where all the trades go through one ‘clearing’ centre before the assets are allocated into different funds or managed accounts. “We spent a lot of money on the system, getting the background on stock picking right. About 80% of our AUM trade is long/short,” says Harnisch. For example, one account may only want to trade in copper or other metal and natural resources. The system will automatically allocate any trade in those areas to that account. Harnisch says setting up the system to allocate only screened, Shariah compliant trades into a Al Safi-based fund would be no different and would not change the way he trades at all. “We’ve set up a good system. A lot of money went into the system and there has been a lot of research on the stock picking side, too. We’ll do 24 | Access to Islamic Hedge Funds Supplement | November 2008 www.hedgefundsreview.com
fund profile whatever is needed to make it work as well for Shariah compliant trades as for our other accounts,” he says, noting that at present around 80% of all AUM is traded as long/short positions through the existing system. Peconic likes to take concentrated positions. But, according to Harnisch, concentration is in the eye of the beholder. Others may not find his positions that concentrated. A different approach In general, he believes the fund takes a different approach to fund management than others. There is a heavy stock-picking orientation. “We tend to develop ideas beyond economic cycle analysis to underlying stock. We pick stocks in companies we believe will benefit from the current economic cycle and over the longer term will provide above-average earnings growth,” explains Harnisch. He explains that the team tends to develop ideas looking beyond the economic cycle. It will look at a stock to see if on the longer term it will provide a significant above-average early growth, say, for example, before the company expands. The portfolio ends up as a series of core positions that meet specific selection criteria on the long and short side. Individual positions can go up to 5% at cost and up to 10% at market value. Typically he says “A lot of money went into the system and there has been a lot of research on the stock picking side, too. We’ll do whatever is needed to make it work as well for Shariah compliant trades as for our other accounts.” william harnisch, peconic partners the portfolio will have its top-10 long ideas making up 40%–50% of the equities traded in the portfolio. As an example of how he views stocks, he explains his rationale behind how the portfolio traded Best Buy. “We were shorting the stock in 1997. We sold short when it was at 45 and it went down to 12.” The stock became interesting again to Harnisch when one of his themes – a shift from analogue to digital – was detected. This he believes was a trend that would drive sales business by a significant amount every year for several years. So he corrected his position and went long. Between 1997 and 2006 the stock moved from $2 to $58. While the stock remained in the portfolio, whenever it approached its sale target price, Harnisch would review its position. Depending on market conditions he would add or subtract the position. At the same time, he might consider shorting competitors to balance the position. Now he says the stock is short in the portfolio. Other core stock positions do not necessarily stay as long as Best Buy in the portfolio. He says his hedge fund may behave a bit differently to other long/short funds. Peconic trades a lot, constantly reviewing positions as stocks approach buy/ sell price and using short positions to hedge that long position. “We trade to adjust the risk of a position, not because of a short-term view of a name,” he explains. The bottom line, says Harnisch, is that since June 2002 he has been able to create alpha on both long and short positions. While results for this year are not as spectacular as in 2007 when the fund was up 64%, it is at least up a reasonable 6% plus this year. “Our clients are very pleased,” says Harnisch, who says compared to the current stock exchange performance, that is not a bad result. Research is key to Peconic’s stock selection. He emphasises that the company is self-contained. “We only use Wall Street to supplement what we do.” There are seven people in research, including Harnisch. Most of their time is spent with the companies they research, talking to managers, visiting the companies. A lot of emphasis is also placed on income and balance sheet analysis. Fundamentals, technicals and quantitative research is done on all the companies. While the fund manager may be US based, the fund itself is global, although Harnisch points out there are no positions in emerging markets. The kinds of companies he takes positions on are global. “We pursue names, mature companies, and these are global. You have to look beyond geography.” For example, Nestlé and Unilever have as much business in the US as their equivalent US corporations, like General Mills or Kellogg, which likewise have significant operations outside the US. What he looks at is how they measure up against absolute return and second, if they are beating the market average over time. Investment into the fund is mixed, with high net worth individuals, institutions like endowments and pensions, and some fund of hedge fund money. Looking ahead to the Al Safi platform, Harnisch does not expect any real problems. Peconic, he says, has worked with almost every major religion and been able to cater for any of their demands on the investment front. He believes the fund will be able to fit into the Shariah compliant restrictions without any real change to the way it trades. Size is no problem As to capacity, Harnisch is confident the fund could easily handle $4–$5 billion with current capacity. After all, he points out, he had managed a $6 billion fund before starting his own hedge fund, so size should be no problem for him. Commenting on current market conditions, he admits the US Securities and Exchange Commission’s shorting ban has had only a limited effect on the way he trades. The real issue is the environment. “We did well in 2007, up all months. But now there is no reason. Markets are up, down. It is completely different this year.” Gross exposure in the portfolio is down to 58%, dramatically lower than in January. Harnisch saw what was coming and adjusted the risk of the portfolio to the environment in January. As things became worse as the year moved on, he was able to modify the portfolio to keep within his risk limits. “What we can do is protect capital. We watch our exposure very carefully. We take risk measures, we look for new risk and we ensure we do not have any dangerous concentrations.” For example, corn usually trades without any relationship to the oil price. For at least three to four months this year, the prices of the two commodities traded in parallel. Therefore, Harnisch ensured that positions in corn and oil were consolidated as one Peconic has worked with almost every major religion and been able to cater for any of their demands on the investment front. Harnisch believes the fund will be able to fit into the Shariah compliant restrictions without any real change to the way it trades. exposure so the portfolio would not be exposed to too much risk if prices went the wrong way. Going with gut instinct He sees the success of the fund as a combination of a sensible attitude towards risk and a good nose for companies. He trusts his gut instincts perhaps a bit more than other hedge funds, but so far it has proved true. He steered well away from Enron long before it became toxic. He thinks the close relationship he and his team have with industries and specific companies means they are able to see good and bad trends long before they hit. At present he is still interested in the analogue to digital story, but thinks it has moved away from television and is now focused on broadband distribution of video and data. He believes in incentivising his team to come up with the good ideas. While basic salaries may be low, bonus payments reward analysts who come up with good ideas. He emphasises that the team – all the investment professionals – works together, to help generate ideas. The system must be working for Peconic, believes Harnisch, as the fund is doing reasonably well and no member of the professional investment team has left the company since 2004. n www.hedgefundsreview.com November 2008 | Access to Islamic Hedge Funds Supplement | 25
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