Hedge Funds Q&A: Ryan Mendes, RVM Capital
Equity hedge strategies endured a challenging 2022 but as we approach the halfway mark in 2023, many stock market indexes are well into the green. AlphaWeek’s Greg Winterton spoke to Ryan Mendes, CIO of Sydney, Australia-based hedge fund manager RVM Capital, to get his thoughts on the year so far, and to learn more about his firm.
GW: Ryan, as we approach H2, what are your main observations from a regional perspective – which geographies have delivered better opportunities, which have been disappointing, and will these trends continue in H2?
RM: Australia is well positioned within the region with its proximity to China and stands to benefit from its reopening significantly. Recently, it appears that relations between the two countries have improved at a faster rate compared to other developed western economies – evidenced in the lifting of trade bans and restrictions for Australian exports. Interestingly, we are witnessing a temporary shift away from the US Markets, with reallocation to UK and Europe increasing considerably. We expect this trend to continue on the back of extended pressure of the USD as the global reserve currency and the aftershocks of the US regional banks crisis which has led to a disappointing performance in financial and banking sectors.
GW: How about sectors? What are your thoughts there?
RM: Every year, with great excitement, millions gather for the launch of the latest tech. For us, we get excited with healthcare as the avenue for positive and impactful innovation. If the pandemic taught us anything, it’s the fact that R&D in healthcare can lead to swift and life-changing outcomes. We believe the sector remains heavily underinvested and Australia is fortunate enough to boast some of the world’s leaders in the industry. Another area we expect to see significant opportunities is in Lithium. Holding the world’s second largest reserve, Australia is well placed to become a potential world leader in its production. We expect this trend to continue as demand for the rare earth metal continues to grow via an expanding EV market and use in consumer electronics.
GW: You run a concentrated portfolio of global stocks. Tell us more about your approach to stock selection and why you’ve chosen to go that route.
RM: The merits and rationale of holding a concentrated portfolio always sparks an interesting debate. Simply put, we like quality over quantity. We would far prefer to hold a handful of exceptional businesses which we intimately understand. Holding too many positions becomes dilutive to returns with the guise of diversification – which in our opinion, carries a false sense of security. At its core, our selection process is derived from simply attempting to solve a problem or predict future human behaviour and habits. This approach, while somewhat contrarian but practical in nature, hopes to deliver desired outcomes for investors while limiting the ‘market noise’ which otherwise temporarily distorts the merits of these businesses.
GW: A question about the Australian hedge fund market. When you consider that your local stock market has around 2,000 listed companies, the hedge fund industry there is small. What’s the reason?
RM: The structure of the financial services industry in Australia is quite different to that of the US. One of those differences is the size and of Australia’s superannuation (pension) industry. Australian pension funds are a third of its 401K counterpart, representing A$3.5 trillion (US$2.2 trillion) in market capitalization verses US$6.3 trillion. This is of particular importance when you consider Australia’s total market is less than 5% in size than that of the US. This distortion of the superannuation industry’s size (which is now larger than the entire local ASX), consequently means net investment flows are predominantly allocated offshore or into low-cost passive ETFs. While we have seen continued growth in the local hedge fund industry with the emergence of local fund managers offering global mandates, the structural nature of the industry translates to a lower appetite to allocate to Australian domiciled hedge funds.
GW: Lastly, Ryan, back to something of an existential question. Whenever equity markets are in a bull run, it becomes harder to beat cheaper, beta exposure. What’s your view in terms of the medium term outlook for equity hedge strategies in a portfolio?
RM: 2023 was always going to be a challenging year to deliver alpha for investors. We believe an active management style is paramount in doing so, especially in an environment in which we currently find ourselves. That being said, hedge funds are back in vogue. Capital preservation and protection against inflation are prominent themes and while index tracking ETFs still play a significant role in a largely passive market locally, we expect investors residence to hedge fund strategies to soften once those low lost beta strategies begin to underperform.
Ryan Mendes is Chief Investment Officer at RVM Capital
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