Portland Hill Capital

Generating a new approach to event driven returns

Originally published in the May 2012 issue

Equity hedge investing has traditionally been the largest area of the hedge fund sector in terms of assets under management and the number of funds in the marketplace. In the past year or so, event driven equity has gained substantial new investor allocations and attracted a number of new managers to set up funds in both the UCITS and offshore sectors.

Few funds have sought to combine long/short and event driven strategies with no strategy silos. Now a new fund from Portland Hill Capital is looking to dynamically allocate capital between event-driven and long/short investment strategies. The fund is global but with a European bias, and will invest across the capital structure with an equity focus (See Fig. 1).

The founder and chief investment officer of Portland Hill is former Goldman Sachs and Eton Park investment manager Thierry Lucas. He was the first London employee recruited to the multi-billion dollar US-based multi-strategy hedge fund headed by Eric Mindich six months before its UK launch in late 2004. After seven successful years with Eton Park trading equity long/short, event-driven and risk arbitrage across the capital structure and via derivatives, Lucas decided the time was right to strike out with a new fund. The fund will launch later this quarter.

Corporate events multiply
“We are quite excited because corporate activity has been picking up,” says Lucas at an interview in Portland Hill’s airy top floor offices on Knightsbridge overlooking Hyde Park. “Every day there is a new event so there are lots of things to look at and situations to be getting involved with. Looking at the January to April period, the interest from investors in our strategy has increased very significantly,” says Lucas.

Indeed, the number of event driven situations has jumped sharply in the spring of 2012. On April 23, dubbed ‘merger Monday’, a raft of deals got done. Among the biggest: Vodafone bought CWW for £1.04 billion, Nestlé trumped French rival Danone with a £7.35 billion offer for Pfizer’s baby food business, while AstraZeneca made an agreed bid of $1.26 billion for US firm Ardea Biosciences.

Such deal flow activity can provide rich pickings for managers like Portland Hill. In March and April, data from Mergermarket shows that M&A activity in Europe passed 500 deals worth well over €60 billion. Given the strong corporate balance sheets and current low interest rate environment, the betting has to be that deal flow for event driven fund managers to trade can only increase particularly as tail risk diminishes.
Lucas will work across the entire portfolio, leading idea generation and allocating capital to the best opportunities on a risk adjusted basis. He will define overall portfolio construction, positioning, timing and sizing of position, hedging and risk management.

Two core strategies
Portland Hill’s portfolio will combine mainly two strategies, both requiring fundamental analysis, and often supporting each other. The long/short value strategy is expected often to reveal special situations early and provide as such a time advantage relative to pure event driven funds. Similarly, work done as part of a complex event-driven situation may allow to position the fund quickly into a long/short trade once the special situation is over.

“We are not focused on any particular sub-segment of the event driven space,” says Lucas. “We have a fundamental approach and always look for catalysts that will rerate or derate a security. Triggers are important to avoid value traps. We will dynamically allocate capital where we find interesting opportunities.”

He adds: “You see a lot of companies moving from long/short to event driven and vice versa over the course of the year and the transition between strategies tends to be less well covered and as such often offers interesting investment opportunities. Sometimes we will allocate capital to a long/short idea based on a fundamental angle that may drift to a hard catalyst over time. Other times, we will be involved in a complex special situation that may become even more interesting post event from a long/short angle. Because we are not organised in silos, we can move efficiently and seamlessly from one strategy to another.”

Focusing on liquidity
The portfolio is expected to be nimble and focus on liquid securities. The aim is to engage in plays that will allow Portland Hill to adjust quickly when volatility increases.

The combination of pedigree, reputation and strategy makes Portland Hill one of 2012’s most keenly anticipated launches at a time when new fund openings have been growing. Many of the launches have come as investment banks have scaled back their proprietary trading operations. But the record Lucas has established as a successful portfolio manager with Eton Park, a big hedge fund that ranked 24th in The Hedge Fund Journal’s latest US 50 survey with assets of $12 billion, is helping Portland Hill generate substantial interest from investors in North America, Europe and elsewhere.

With markets remaining characterised by extreme volatility, it is clear that investors will remain keen to dampen the potential impact of this on their portfolios. For this reason, event driven strategies such as the one offered by Portland Hill are getting close scrutiny from pension funds and other allocators across the investor spectrum.