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Alternative Market Briefing

Global long/short equity hedge fund returns double-digits through inflation

Monday, April 25, 2022

Theron de Ris
B. G., Opalesque Geneva:

A global long/short equity strategy, which deploys long-term capital into small and mid-cap ideas in out-of-favour segments of the market, has returned about 22% in the last 12 months through well-thought-out exposures.

London-based Eschler Asset Management LLP, the manager of that strategy, is an independent investment practice modelled on the original Buffett Partnership. The managers, who invest heavily in it, look for resilient businesses in capital-constrained markets.

Eschler's founder Theon de Ris will present at the Manager Discovery Panel webinar on Tuesday May 3rd, at 11 am ET.

Inflation's impact on equity returns

Eschler's strategy produced double-digit returns in the first quarter and in the last year despite inflation's negative effect on equities.

It is agreed that, in general, high inflation correlates with lower returns on equities. Although historically, periods of high inflation have seen both positive and negative stock market returns. Inflation is one of the many factors that contribute to stock market performance. Furthermore, over time, investing in equities in the long term can be a way to outrun inflation.

But according to Theron de Ris, the impact of inflation on equities should be seen through the real returns lense.

The relentless rise in inflation over the past year is something not seen in decades, writes de Ris in a Q1 letter to investors seen by Opalesque, in which he seeks an understanding of what current conditions imply for portfolios navigating the current backdrop.

"The first quarter shattered the conventional wisdom that equities are a good hedge against high inflation," he explains. "A recent CFA Institute article looked at this empirically for the 74-year period 1947-2021. Nominal monthly equity returns of 1.2% are comparable whether inflation is high (>10%) or low (0-5%). But inflation-adjusted (real) monthly returns of 0.1% during very high inflation compare to 0.9% monthly returns when inflation is well-behaved in the 0-5% range. High inflation is corrosive on many levels, and that includes all but eliminating real equity returns.

"What about equity performance when inflation is elevated, and the Fed is tightening monetary policy? Even worse. The 1970-1982 period serves as a guidepost. According to Verdad Advisers, during this period when inflation averaged 8.6%, real equity returns were "deeply negative" during those 59% of months when the Fed was hiking. As an aside, during those hiking periods, bonds outperformed equities, with lower drawdowns."

Despite these headwinds, and with a net equity exposure averaging 87%, the Partnership achieved a positive quarter. De Ris explains it through its largest exposures which continued to be precious metals, energy, and resources, all of which performed very strongly. "It turns out that when inflation was above 5% since 1947, coal mining, energy and materials produced strongly positive absolute returns," he adds. "This held true even when excluding the 1973-1986 period (when high oil prices explicitly drove high inflation)."

However, given a reasonably hostile investing backdrop for financial assets, the manager has resolved to dial back exposure, targeting gross exposure close to 100% of net assets. Homebuilding, engineering, insurance, and certain industrials are areas targeted for further research. With cash now 13% and shorts 14% of net assets, Eschler is in a position to move quickly should the clouds clear and opportunities arise.

The fund

The Eschler Partnership invests in well-financed businesses with attractive normalised returns on capital run by owners/operators. The strategy combines market cycle and industry analysis with bottom-up stock picking.

The B Share Class Lead Series, a $20m fund incepted in October 2012 and domiciled in the Caymans, is up 11.6% YTD after returning 6.6% in March, annualising 12.7% returns. The Credit Suisse Long/Short Equity index is down -3.3% YTD after returning +0.5% in March. The Russell 2000 index was down -7.6% in Q1, and the S&P 500 -4.6%.

Theron de Ris gained experience as a senior analyst at Indus Capital Partners. Prior to Indus, he spent 13 years managing equities at Goldman Sachs and Morgan Stanley in Frankfurt, Milan, and London.

Eschler Asset Management is the management company of Derby Street Managers, Tollymore Investment Partners, ARR Investment Partners, and Agera Capital.

Next Opalesque webinar:

Manager Discovery Panel: London

Meet five brilliant fund managers and hear their presentations in this interactive webinar.

• 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 here:

Related article:
21.Feb.22 London-based hedge fund continues to gain from out-of-favour segments of the market

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