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strategy profile
“We do not hold
more than 10%
in an individual
security and in
reality this figure
is much lower in
almost all cases.
We’re fundamental
investors.”
Panayotis sparaggis,
alkeon capital
management
and believes that it is a different skill
set to forecast commodity prices.
Focusing on growth
The focus is on growth, seeking out
the best stocks and also those that
are being challenged which could be
candidates for shorting. The process
concentrates on the profitability of a
company, its balance sheet, strength
of its management team and other
key factors. If these are all positive,
and show the potential for growth,
the stock could be a candidate for
the long side of the portfolio. If the
equity displays negatives in these
areas, then it could become interesting
on the short side.
Sparaggis believes this technique
holds true in any market. He is also
careful only to invest in publicly
traded, liquid stocks.
One area of particular expertise
is in technology, which Sparaggis
loosely describes as TMT (technology,
media and telecommunications),
life sciences and alternative
energies. With his own background
– a PhD and Master’s in electrical
and computer engineering and an
MBA from the University of Massachusetts,
as well as an IBM fellowship
in physical sciences – he
has the knowledge and capability
to understand this particular sector,
although Alkeon is not tied to just
this sector.
Part of the attraction of technology
stocks, says Sparaggis, is
that companies which innovate are
decoupled from the economic cycle.
The focus is on product cycle and
during disruptive cycles growth has
little to do with what is happening
in the economy around it. These
cycles are clearly defined, with a
beginning, middle and an endpoint,
and are relatively short, lasting two
to three years sometimes.
By focusing on the product cycle,
Alkeon looks at what developments
are likely to add significant value
to a company, or the reverse for the
short position. Traditionally the
portfolio has a 30%–70% net long
bias. But the real strength, Sparaggis
believes, is the team’s ability
to find alpha not just on the long
side, but on the short side which
provides excess returns. “Most long/
short funds break even on the short
side over the long run. We can add
significant alpha on the short side,”
he says. “If we can provide alpha
over both long and short positions,
this enhances the long-term return
of the portfolio.”
This technique has been particularly
successful in technology; Sparaggis
says they have had “a lot of
success in technology shorts”.
For the long side Alkeon looks at
a company’s probabilities for failure
or success, given its business model,
and across its entire structure. In
technology, a company’s good idea
could become obsolete overnight.
“The fundamentals change very rapidly,
there is volatility in the fundamentals
and this is what we exploit
on the short side,” says Sparaggis.
Ideas from industry
How Alkeon finds companies is
simply through a strong network of
industry contacts. “We get our best
ideas from the industry, not Wall
Street,” Sparaggis confirms. He says
Alkeon meets with hundreds of
companies every year.
“We talk to them. It is classical
deep research. Maybe it sounds very
tedious and unglamorous, but it is
highly effective. When we meet with
these companies we have intelligent
conversations about business trends.
We share information. We build
relationships at a deeper level. It is
not one-way communication. It is
not a meeting set up by Wall Street
where you have a few questions. We
come prepared. We understand the
foundation of the business and add
intellectual depth to the discussion,”
Sparaggis explains.
This relationship built with senior
managers of companies is what
Sparaggis believes gives Alkeon’s
team its edge in producing alpha
consistently on both the long and
short sides. The experience of the
team also helps them make the right
investment decisions during volatile
times. When markets are dislocated,
it is difficult to understand them.
Sparaggis believes his team is able
to do this and exploit the dislocation
and volatility while managing risk.
“The current liquidation and
redemption process by hedge funds
and funds of funds has led to a severe
industry dislocation, which creates
opportunities. It is very attractive.
But we still preserve the integrity
of the process. We go forward with
reasonable participation opportunities,
but we do not expose ourselves
to a level of risk that we would not
normally have. We are balanced. The
temptation is to shoot off and buy
everything. That’s a natural inclination.
But our ability is in a measured
response, decisive on stock selection
and sizing,” says Sparaggis.
When there is severe downward
market dislocation people are often
forced to sell. They need to deleverage;
they need to raise cash. This
kind of environment creates opportunities
with stocks going down
with no regard to the actual value.
Nevertheless, Alkeon keeps to the
same principles, despite the plethora
of opportunities presented.
“We keep our focus, approaching
positions from the private buyer’s
perspective. Is this a good business?
Strong fundamentals, strong management
team, strong balance sheet?
Bear, bull, dislocated or normal markets
– there are always opportunities
and of course better ones in a dislocated
market. We are always looking
for the opportunity to make money,
but we will stick to our fundamental
principles,” explains Sparaggis.
He agrees the current market has
thrown up many attractive opportunities.
However, he is adamant that
even with so much opportunity,
Alkeon must exercise a reasonable
level of caution, maintain high
liquidity and above all protect the
portfolio. “There are three levels of
portfolio diversification we emphasise.
We don’t depend only on a
couple of countries or sectors. There
is no dangerous concentration. We
keep a reasonable level of diversity,
with high liquidity, staying well
diversified across all countries, sectors
and individual securities.”
Avoiding blow-ups
Sparaggis believes hedge fund
blow-ups and poor performance are
caused by two things: excessive leverage
and excessive concentration.
“We try to avoid both by design,”
confirms Sparaggis. “We do not hold
more than 10% in an individual
security and in reality this figure
is much lower in almost all cases.
Typically, Alkeon holds between
100 and 150 stocks in the portfolio
with a one- to two-year horizon on
all investments. We’re fundamental
investors. We have price targets for
both our long and short positions.
We scale in and trim our positions
as we approach price targets. We
take advantage of volatility. Our
turnover is in direct proportion to
the underlying volatility,” says Sparaggis.
But he is clear that Alkeon
does not allow itself to be seduced
by the opportunities, particularly in
times of severe market dislocation
as evidenced now.
For all the positions, both long
and short, a price target is set. Some
stocks hit the price target relatively
quickly, within a month or two, while
others may be held for up to two
years. Sparaggis explains as a stock
approaches the price targets, Alkeon
might increase or decrease its position.
“We’ll do some opportunistic
trading as a stock approaches our
price target. We may retreat, we
may add to the stock position,” says
Sparaggis.
Certainly Sparaggis believes the
intensive research and extensive
industry contact network is fundamental
to Alkeon’s edge and its
success in picking long and short
positions.
Alkeon is not macro focused. It
uses macro inputs only to assess
risk as it relates to individual stock
picks. For example, explains Sparaggis,
if he is looking at a particular
company in China or Russia, he
will look at the macro-environment,
political risk and any other factors
relevant to the company so that he
has a clear view to assess the risk.
“But macro doesn’t drive investment
decisions. We look at business
analysis and macro issues only on
the risk side. If we are uncomfortable
with the risk, we won’t invest,”
he says.
The approach of Alkeon is consistent,
says Sparaggis. The company
will remain diversified and
global, and the stock picking will be
based on extensive research across
all sectors.
His strategy has proved popular
with his investors. Sparaggis confirms
he looks at investors as partners
in the strategy for the long
term. “We have a very loyal investor
base. We make the effort to ensure
investors understand our strategy
and understand the asset allocation.
It is extremely important to us that
they are in the strategy for the long
term,” Sparaggis concludes. n
34 | Access to Islamic Hedge Funds Supplement | November 2008 www.hedgefundsreview.com