Best Performing Long/Short Equity – Global Fund

Originally published in the April/May 2013 issue

Alpha generated almost all of the 15% gross performance produced by Zenit in 2012: some 13% was alpha and only 2% beta. While the fund has sometimes historically taken bigger directional views, lead portfolio manager Martin Jonsson kept beta-adjusted net exposure in a tight range between +25% and -30% last year. The fund’s gross exposure below 100% on average was relatively low with Value at Risk between 0.1% and 0.6%. Double digit returns combined with low single digit volatility vaulted the Sharpe ratio up to 4.2 – an exceptional achievement for a fund that also has a Sharpe above one since its inception in 1996.

The return attribution was very broad-based, accumulating lots of small profits with no single stock dominating. Attribution also demonstrated a very asymmetric profile: 25 positions made more than 0.20% with just three losing more than that amount. This position-level picture is consistent with the historical pattern of monthly returns, which have been positive two-thirds of the time.

Returns also rested on solid foundations in that both long and short books contributed – frequently trading the same stocks from both the long and short side. Zenit’s approach of sector specialisation with a limited coverage universe aims atdetermining the main share price drivers at any given time for all stocks within the core universe. As discrepancies occur between Zenit’s view and other market participants the fund takes a position regardless of direction.

Telecom services, industrials and financial services were the top three sectors for Zenit last year but the team covers nearly all sectors bar healthcare. Investor AB alumni Martin Jonsson and Anders Wennberg sit in Stockholm, managing TMT and consumer discretionary sectors. Over in London Tom Hedges, who formerly ran the award-winning Gartmore Alphagen Rhocas fund, does global financials. Stephen Irvine, also in London, specialises in the cyclical sectors: energy, steel, mining, industrials, oil services. Seven analysts assist the PMs.

The four managers, who co-invest their personal assets in the fund, are free to build their own books within well defined limits, but position sizes above 1.5% require a formal discussion with the other PMs. The trading style is active with the book being turned over about 10 times per year. The total fixed expense ratio is typically below 2%, partly because the fund charges a 1% management fee.  

Going forward the return target is 10-15% through the cycle. While Jonsson admits that 30% could be a very strong year, he thinks that in the current climate returns as high as 40% or 90% made by Zenit in the late 1990s may not be realistically repeatable. The collapse in equity correlations seen in the second half of 2012 is increasing potential to generate alpha from a broadly market neutral, stock-picking strategy. Zenit think that subdued global economic growth, combined with persistent problems in some parts of Europe, places a premium on active stock selection.

If correlations do go back up, Jonsson says that navigating the markets could then become more challenging. In a high correlation market, the macro directional positioning and risk management play a bigger role in running the fund. Judging by the fund’s near-zero correlations to world equities and global bonds since 1996, Zenit has been adept at sticking to stock-picking disciplines through both bull and bear markets and has attained its aim of low equity market correlation.

Zenit is currently structured as a Swedish Krona-denominated Swedish special fund, although the company is contemplating setting up  a structure to better cater for foreign investors. Zenit’s investor base is stable and weighted towards high net worth individuals from the Nordic region.

Zenit has a sub-allocation from Brummer’s multi-strategy fund, which levies no extra layer of fees and gives investors diversified exposure to eight Brummer hedge funds across equity, event, credit, fixed income, macro and CTA strategies. The multi strategy fund has a variety of currency share classes, and also a double leveraged version.