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Alternative Market Briefing

Long/short equity hedge fund with bear market experience has a winning quarter

Thursday, April 14, 2022

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Christian Putz
B. G., Opalesque Geneva:

Experience during a Russian bear market lasting five years enabled Christian Putz to identify certain investment patterns in the market which he now applies to his current investment strategy.

London-based ARR Investment Partners' Global L/S Equity Strategy was up 16% (net) in March, with a Sortino Ratio of 1.43, and an annual return of 10.4%. It is currently up 27% YTD (as at April 13, 2022).

The Eurekahedge Long Short Equities Hedge Fund Index was down -3.5% in Q1 and the HFRI Equity Hedge (Total) Index -3.8%.

"The strategy has profited on both the long and the short side. We have shorted overvalued tech companies and been long the energy and industrials sectors, as well as rebound situations in oversold Kazakh companies," Putz, ARR's CEO and portfolio manager tells Opalesque.

Prior to founding ARR in 2015, Putz worked at Kazimir Partners managing their Long/Short Equity Master Fund and specialised in Eastern European markets. He started his institutional investment management career at MAN Group.

He will present at the Manager Discovery Panel webinar on May 3rd.

Great risk reward opportunities

To achieve both attractive returns over the long run and capital protection during downturns, ARR uses a quantamental approach to invest in opportunities that have asymmetric risk-reward - hence the name 'ARR'.

The term quantamental is a portmanteau of quantitative and fundamental and thus refers to an investment strategy that involves combining quantitative and fundamental approaches to investing, with the aim of improving returns. An asymmetric risk/reward is an imbalance between the risk and the reward. Thinking in terms of risk-to-reward ratios, a positive asymmetric risk-to-reward is when the risk taken was less than the actual profit, or when the potential for gain is greater than the potential for loss.

"Our investment process at ARR is both top-down (to avoid big market corrections, so for risk management purposes) and bottom-up (to profit from strong single stock movements, so stock selection)," Putz explains. "So, globally we look at all kinds of risk factors like exchange rates, volatility, leading indicators, liquidity factors (top-down) in order not to be caught by surprise by any significant developments. At the same time, we screen our global stock universe for the best longs and shorts according to fundamental and technical criteria (bottom-up)."

Here ARR looks at the four investment patterns which are characterised by great risk-reward opportunities: (1) Long Stock Rebounds, (2) long Dynamic Profit Growth, (3) Short Hype / Bubbles, (4) Short Structural Losers / Downward Trends. The portfolio holds high conviction positions (15-40) and risk is actively managed with short positions, stop-losses, and put options.

Behavioural edge

Much of the strategy's success in the past has been down to maintaining flexible exposure and an unconstrained mandate. This allows ARR to have high conviction and pounce upon their best investment ideas, but also exercise patience when they do not see attractive opportunities. This describes ARR's behavioural edge.

"For example in February/March 2020, when Covid spread to Europe, the risk was clearly on the downside and the risk-reward for short trades was often 1:5 or better," Putz says. "In February 2020. if you are right with your thesis that Covid will be a global problem and not just a China problem, you make a lot of money shorting airlines, oil and gas companies, etc. If you are wrong and Covid is constrained to China, you might lose some money but nothing in comparison with what you could earn. So, we are one of the rare hedge funds which also goes net short if we see great opportunities on the short side (flexible exposure and unconstrained mandate)."

The strategy was up 34% in 2020. However, in the following year, it lost 20%.

"2021 performance was disappointing due to certain themes not playing out as we would have hoped," he notes. "For instance, we viewed certain Chinese companies with great fundamentals as attractive investments, but in hindsight, underestimated their political risks. The same is true for certain renewable energy stocks which fell despite outstanding fundamentals. A key lesson learnt is to remember that when political risks exist, they can often outweigh the effect of fundamentals, just like we have seen during the ongoing Russia-Ukraine crisis."

Bear market experience

Putz's experience as an investor in Russia during a prolonged bear market (from March 2011 to Jan 2016) has shaped ARR's investment strategy today. Throughout this period, there were several times when stocks fell over 20% within two months, where he identified certain investment patterns (on both the long and short side) that he has formulated and applied to the process ever since. Putz has invested globally since 2015.


Next Opalesque webinar:

Manager Discovery Panel: London

Join us for an interactive presentation and discussion with five London-based equity managers:

• Theron de Ris, Eschler Asset Management
• Richard Simons, Derby Street
• Mark Walker, Tollymore Investment Partners
• Christian Putz, ARR Investment Partners
• Mathias Wikberg, Agera Capital

When: Tuesday, May 3rd, 2022, at 11 am ET
Free registration: https://www.opalesque.com/webinar/

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