Fund Review – Qato Capital Fund

Qato Capital last year rose to be the first ranking of 74 long/short market neutral managed funds.

In just over twelve months of investment, the total return from August 1 2014 to 31 January 2016, was recorded as 32.5% compared with -11.3% for the ASX 100 index from which Qato selects its portfolio. Such out-performance is no guarantee of future returns, but it has stimulated my interest in the underlying investment philosophy.

In common with many other retail investors I am a long only, discretionary investor, not likely to now change my basic approach, but curious to discover if any aspects of their strategy could improve my profits.

Increasingly, major institutions are including hedge funds to boost returns in bear and static markets. Qato has been labelled a small hedge fund, and as such it may tap into demand from retail investors to also profit from falling markets.

No two hedge funds have identical strategies. Most are private investment vehicles, with large minimum deposits, relative illiquidity and high fees. Commonly they seek arbitrage opportunities in markets, including bonds and Forex. They will often invest in the rescue of distressed companies, and exploit opportunities in merger and acquisition events. Returns can be high, but the risks involved render them unsuitable for retail investors.

I became interested in Qato after reading an article in the Traders’ Forum website “Ten Bags Full”. CEO and CIO Ben Silluzio has taken more than ten years to develop his own unique investment philosophy, one which to date in a difficult market, has met with remarkable success.

Click to access Qato-Capital-EurekaHedge-Interview.pdf

These are some of his principles and figures, as I understand them, in the references above.

  • There was $31 million in Funds Under Management in April 2015, making it a boutique fund.
  • The fund invests in 30 ASX 100 stocks, 15 long and 15 short to be market neutral. All investments are equal in dollar terms. i.e. They are all good quality stocks.
  • Selection is ‘rules based’ using both historical and forecast fundamental data (such as Earnings, Cash Flow, Book value, Return on Equity, and Valuation). This information is used to calculate a Q-score. There are pre-set  holding periods and risk management processes.
  • Long positions are taken in stocks with “deep value” i.e large quality stocks under-performing the market (low Beta) for one reason or another.
  • Short positions are taken in stocks which have out-performed the market (high Beta) but whose status is becoming shaky, and the price volatile. One notable recent example is BHP
  • Leverage and derivatives are totally excluded to limit risk
  • There is no attempt to predict the market. The portfolio is re-balanced at monthly/ quarterly reviews.

The investment policy appears sound, and there is careful attention to risk management. The fund could therefore prove to be a suitable one for some retail investors.

Interested readers should always do their own further research, and seek professional advice before investing.




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