Access to Islamic Hedge Funds - Incisive Media

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