Among the many institutions making a push to develop their hedge fund products, ING Aeltus is pursuing an interesting approach, providing a great deal of independence to its various hedge fund managers. The $60 billion management firm was created in June 2001 by the combination of ING Furman Selz Asset Management and the Aeltus Investment Management unit which came into ING as part of its December 2000 acquisition of Aetna Financial Services. Reflecting Furman Selz' long history in the hedge fund sector through fund management and prime brokerage services (now part of ABN-AMRO), the firm currently offers more than 20 sponsored funds managed by individual portfolio managers. Some funds were launched more than twenty years ago but most were started more recently. One such fund is Double V Partners, a long/short small to mid-cap U.S. equity fund, launched in October 2000 by Robert Vicas and Ernst von Olnhausen who worked together for ten years in institutional sales at Furman Selz LLC and its successor firm ING Barings LLC, following the 1997 acquisition of Furman Selz by ING. At ING Barings, Robert Vicas was Senior Managing Director responsible for the International Equity Division in London and New York and Ernst von Olnhausen was Managing Director covering Swedish and Norwegian institutions. They raised $27 million in 2000, including $10 million from ING. Since then the fund has grown to $55 million and is up 21% year-to-date. Robert Vicas and Ernst von Olnhausen spoke to HFN publisher, Antoine Bernheim, in mid-October.
Profile of Robert Vicas
Born: May 2, 1956
Education: BA in History, University of California, Santa Cruz; Institut des Sciences Politiques, Paris France
Family: Wife: Martha, three children, Natalie (8), Alexander (8) and Jeremy (6)
Last vacation: Toured the Castles of the Loire Valley
Last book read: The Killer Angels by Michael Shaara
Favorite quote: "There is more to life than increasing speed" Gandhi
How he best describes himself: Decisive, open-minded, positive, willing to try new things.
Profile of Ernst von Olnhausen
Born: October 8, 1961
Education: DHS, Handelshogskolan (Stockholm School of Economics), Studies at NYU Graduate School
Family: Wife Monica, two children Oliver (9), Nicole (7)
Last vacation: Luzern, Switzerland and Lago Como, Italy
Last book read: Beyond the Sky and the Earth by J. Zeppa
Hobbies: Skiing, tennis, boating and riding motorcycles
Favorite quote:"I find that the harder I work, the more luck I seem to have" Thomas Jefferson
How he best describes himself: Prefer the path less traveled, focused, believer in perspective and balance, always interested in learning.
Q. How did you decide to start your hedge fund within ING ?
A. We have known each other and worked together for fourteen years at Furman Selz which was always known for its focus on small to mid-cap growth stocks. We both started managing long-only money four and six years ago, respectively, as a tangential activity to our sales activity. We both produced good returns without a down year in a period that was a difficult environment for small and mid-cap stocks, but we came to realize that we could no longer manage money as a sideline. We decided that the ideal format was a hedge fund, because, as a group, those stocks could become excessively over-valued as well as under-valued. We sought the advice of Ed Hajim, Chairman of ING Aeltus (and formerly the Chairman of Furman Selz), who suggested that we come to ING Furman Selz Asset Management. The benefits for us were very simple: IFSAM allowed us to launch the fund very quickly, gave us office space, taking care of all our administrative needs and providing us with a trading room and a risk management team. Another benefit is that all trade executions are handled by a centralized trading desk, concentrating business so that we can leverage off of this and have access to any firm on the Street, even though our asset base is still small. In addition, many of our former colleagues, our former Director of Research, software analyst, health care analyst, are now managing separate funds under the ING umbrella and we can share views and ideas with them.
Q. Could you describe your investment philosophy?
A. We focus on small to mid-cap companies ($100 million to $10 billion in market capitalization) because they are less efficiently priced, by definition, than the large cap companies and have recently been very undervalued. We are bottom-up stock pickers and build the portfolio stock by stock. We are very value-driven, we buy value stocks and "GARP" situations, but we focus very much on growth industries, such as telecommunications, media, healthcare and financials. With research, we can uncover value that has not been recognized in the marketplace. We also try to look for situations where stocks are severely overshooting on the upside when the fundamentals have been working for some time and where we may identify catalysts for short-term under-performance.
Q. Could you describe your research process ?
A. We attend conferences and spend a fair amount of time on the road visiting companies to understand their strategy. We then track on a regular basis that their strategy continues on the course that was initially laid out to us. Over the past twenty years, we have developed a vast network of analyst contacts, some of whom have become portfolio managers and hedge fund managers, as well as company management. From time to time, we use screens as a complementary tool and we also use Wall Street research selectively.
Q. Could you describe the typical structure of your portfolio?
A. Our long exposure has ranged between 40% and 80% and our short exposure between 10% and 40%. We divide our portfolio into three components which we try to have represented in approximately equal amounts so as not to be overly style-biased: value, GARP and momentum. We have a core portfolio of 15 to 20 names representing 75% of the portfolio, all coming from the value or the GARP box, each position being anywhere between 2% to 5% of our equity (at cost). The trading portion of our portfolio comes from the GARP and the momentum box and represents 25%, made up of 15 to 30 names with each position between 0.5% and 1.5% of our equity, also at cost. On the short side, we have 20 to 40 names, each one between 0.5% and 2%. In the trading portion of our portfolio, which can be intra-day to two or three weeks, we trade large cap stocks as well and there has to be a short-term catalyst, a corporate development, an analysts' meeting or some form of market dynamics such as an excessive short position.
Q. What do you look for in your core holdings?
A. Our ideal investment would be a company that is number one, two or three in its sector, sales growing at a double digit rate, a management team with an excellent track record and incentives in line with that of shareholders. We favor service businesses that generate free cash flow, build asset values over time, and have a lot of recurring revenues and high barriers to entry. We tend to underweight companies with short product life cycles such as technology companies. Our valuation analysis focuses on discounted cash flow and a P/E usually less than the growth rate, the higher the growth rate the bigger the discount. An example of that, albeit at the low end of our growth spectrum, would be one of the largest video rental retailers in the U.S. When we established the position around $10 a share a year ago, the stock was trading at three to four times EBITDA, because of fears that video on demand was threatening their future. The company has generated tremendous free cash flow, increased its already dominant market share and actually benefited from new technology, not video on demand but DVD. There is new management in place with a very strong track record and we felt that the competitive landscape was such that the pressure to open new stores at a very rapid rate was diminishing.
Q. Could you describe your approach to hedging?
A. We have a long bias as we believe that in the long run the market risk is a positive one that you don't want to eliminate. Our net invested exposure has ranged between 25% and 55%. We short stocks for three different reasons: to reduce the sector risk of our longs, to reduce market risk and to generate positive performance, in any kind of market environment. We look for overvalued companies with promotional management where we can identify a catalyst that will correct the overvaluation. We use a lot of derivatives, we do a lot of covered call writing on our core holdings as they approach our price target and we also buy some puts on individual positions. We generally look for offsets of our longs and try to pair a long with a short when we can. For instance, we have been long debit card processors and short credit card processors which sell at three times the valuation of our debit card companies even though the industry is mature while the debit card industry is growing rapidly.
Q. How do you control risk?
A. In addition to diversified portfolio and limited capital allocation per position, we are big believers in capital preservation and we have not used leverage since inception. We really try to manage risk at the individual security level through stop-losses: a 30% decline in one of our core holdings or a 15% adverse movement in a trading position or a short position would normally trigger a stop-loss. We also make sure that we limit sector exposure through diversification and by offsetting longs with shorts in the same sector. One of the benefits of being part of ING is that we have an excellent risk management department. They monitor the risk parameters for all the hedge funds that are part of this group such as volatility, correlation to various benchmarks and drawdown analysis. We look at this data to monitor our risk profile.
Q. What are your goals for the future?
A. There are currently four people in our team and we have identified an analyst to bring on board early next year. Our plan is to close the fund after we have raised $250 to $300 million.