Alternative Market Briefing

Sorengo's directional long/short equity fund fishes in a different pond

Friday, March 28, 2025

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By Opalesque Geneva:

American-born Theron de Ris founded Sorengo Partners Ltd (as Eschler Asset Management) in London in 2017 to deploy long-term capital into resilient businesses in capital-constraint markets. It has worked well for him, with only one down year.

Indeed, the Sorengo Partnership Fund fishes in a different pond. The directional long/short equity strategy* applies a counter-cyclical approach in its fundamental analysis; it focuses on the supply side, instead of the demand side, and targets businesses with strong balance sheets, with a preference for management with skin in the game.

The hedge fund has annualised 12% net since its January 2017 inception (to February 2025), compared to 11% for the MSCI ACWI TR USD index (large and mid-caps in developed and emerging market countries) and 7% for the Russell 2000 TR (US small-caps).

Focus on supply cycles

"At Sorengo Partners, we exploit inefficiencies created by the capital cycle," Theron de Ris explains in a recent post on LinkedIn. "While investors generally focus on demand, we believe fluctuations in the supply of human and investment capital dictate industry and regional economics, cyclicality and long-term returns on capital."

While the market focuses on the potential for a demand shock created by US federal spending cuts in the near term, he believes the focus should pivot to supply shocks to labour and product markets produced by new policies on border control and tariffs, which will lead to higher prices. In the longer term, re-engineered supply chains, greater domestic capital investments and lower taxes could lead to a supply-side boom. But for now, a supply-shock scenario could lead to stagflation. This is one of the reasons his asset allocation remains long government chaos and 90% ex-US.

"Our positioning diversifies the portfolio quite nicely," he tells Opalesque. He continues to have precious metals exposure, for example. The fund also has a small but growing exposure in China, which, despite having been in a bear market for a while, still offers some interesting supply-side improvements. About half the portfolio is in broader Europe and the U.K., "with a bit of an overweight in the U.K., where we're finding opportunities at lower valuations relative to the U.S."

Theron de Ris will participate in the Small Managers Big Alpha Episode 16 interactive webinar on Thursday, April 3rd (details below), during which he will talk about Sorengo and the upcoming launch of Zenith Alpha Management (ZAM), a multi-manager fund with a single performance fee and a high hurdle rate.

Recent investment

One of Sorengo's principles is to look at how fluctuations in the supply influence industry. Ideally, the manager will invest after capital has exited an industry and when capital is scarce. If that can be done, one can earn higher returns on capital until competition starts to increase again.

For example, the manager has invested in coal, on and off, over the last five years. The coal industry went almost bankrupt about 10 years ago due to low-cost natural gas in the U.S., environmental regulations, and a slow-down in Chinese demand. This was followed by Covid. According to the International Energy Agency (IEA), global coal use rebounded strongly after plummeting at the height of the pandemic. It rose to an estimated 8.77 billion tonnes in 2024, a record. Some of the coal companies have relisted, de Ris continues. There had been a major underinvestment in the industry, and it is still the case, despite demand being stable and coal still representing about a third of primary energy sources.

Sorengo recently invested in a royalty company in the U.S., Natural Resource Partners (NRP), which has 13 million acres of mineral rights on metallurgical coal assets. It supplies the growing global steel market. This company was one of those that did not go bankrupt and that managed to pay most of their debts. NRP's multiple is still low compared to what it used to be, and de Ris thinks the share price is worth twice as much.

* Long/short equity is an investing strategy that takes long positions in stocks that are expected to appreciate and short positions in stocks that are expected to decline. Directional investing is based on the investor's view of the future course of something: either the overall financial market or a particular security. The HFRI EH: Long/Short Directional Index is up 0.9% YTD (to end-February) and 9.6% in the last 12 months.

Upcoming webinar:

Free registration here: www.opalesque.com/webinar/