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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
contacts page Contacts for Al Safi Trust Platform Fund-linked Derivatives Frank Gerhard Director, Head of Fund Derivatives Product Strategy +44 (0)20 7773 1328 frank.gerhard@barclayscapital.com Nicolas Robin Fund Derivatives Structuring +44 (0)20 7773 5751 nicolas.robin@barclayscapital.com Postal address Barclays Capital 5 The North Colonnade Canary Wharf London E14 4BB UK Market Solutions Group Harry Martin Director, Market Solutions Group – MENA +971 4 362 1015 harry.martin@barclayscapital.com Postal address Barclays Capital The Gate Building Level 9 West Wing Dubai PO Box 506504 United Arab Emirates Prime Services Kieran McCann Director, Prime Services Sales +1 212 412 1105 kieran.mccann@barclayscapital.com Lauren O’Hara Director, Prime Services Sales +1 212 412 3176 lauren.ohara@barclayscapital.com Postal address Barclays Capital 745 Seventh Avenue New York City New York 10019 USA www.hedgefundsreview.com November 2008 | Access to Islamic Hedge Funds Supplement | 35
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