What is Trafalgar's investment philosophy?
Our approach is entirely event-driven. We research and evaluate opportunities as they arise. Every day, numerous companies are going through event situations, such as bankruptcies or takeovers, and we examine the impact these will have on the company's securities. For example, if Club Med's equity is up 14% on a given day, on the back of a French broker suggesting Accor may bid for the company, then we will immediately research Club Med, the hotel sector, the range of Club Med securities, etc., to see if there is an attractive investment to be made.
Who are your investors and what are your fund flows like?
Our investors are mostly fund-of-funds investors. A few of our clients are pension funds or high-net worth individuals. The make-up of our investor base has not changed much since we launched our funds and we've had consistently positive asset inflows for the last two to three years. I don't see any major changes in the pattern of inflows to our fund or to hedge funds in general. There may be some hype in the press regarding hedge fund inflows rising significantly this year, but my view is that inflows are already healthy and I expect them to remain so. Our first fund, the Trafalgar Catalyst Fund, has $360 million and is soft closed, while our second, the Trafalgar Recovery Fund, has $100 million and is still growing.
Are your investors demanding greater transparency?
The whole point of a hedge fund is to do things opportunistically and in a low-profile way. Increasing disclosure to investors undermines this process. If everybody in the market had the same information, many investment opportunities would cease to exist. Our goal is to do something a little bit different than other investors, while conducting thorough due diligence and tracking companies and managers closely. While we don't have full disclosure, we are very organized in our communication to investors.
How do current economic/market conditions affect your funds?
Even though we are not positioned with respect to the macro economy, a highly changeable macro environment does make our job tougher. At the moment, it is difficult to spot trends on any number of levels. Take foreign exchange or credit risk movements: the U.S. dollar is now back down at 122 to the euro, after having been on a seemingly interminable upward hike and hitting 128.50 earlier this year. Credit risk has been significantly re-priced in the last 18 months, with spreads going from wide to tight over that period. These dramatic moves create dislocations in the market and events that were anticipated fail to materialize. Also, we typically make additional returns on post-event situations, and that upside is diminished if bond or equity markets are less positive.
What are the main challenges facing you?
We plan to stay focused on our core business: investing in a hedge fund is about picking good managers and good strategies. The fact that the markets are in a transition phase--with the dollar gyrations, the stock market rally flattening and credit spread contraction flattening--means that this will be more challenging in and of itself. The decision for the fund of funds to take the chips off the table in short funds, or to get back into merger arbitrage, or to cut exposure to distressed debt, gets harder. However, the challenge of picking a good manager is no more difficult today than it was 12 months ago.
How leveraged is your fund and other hedge funds?
There is definitely more leverage among hedge funds now than there was one year ago. The major difference with the situation in the late 1990s (prior to Long-Term Capital Management) is that the leverage is dispersed across many hedge funds, rather than being concentrated in just one or two. Nowadays being one to two times levered is quite a lot. However, five years ago, funds could have been up to eight times levered. The more levered the fund, the more vulnerable it is to having seriously bad periods.