Hadron approaches the 10-year mark with its long-established multi-asset catalyst-driven style of investment

July 29, 2014  

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Marco D’Attanasio’s boutique is well-positioned for an uptick in European corporate activity with its tried-and-tested and diversified long/short approach to catalyst-driven investing

  Marco D’Attanasio
Hadron Capital, the City of London-based hedge fund boutique focused on a multi-asset approach to catalyst-driven investment opportunities, is just a few months away from completing its 10-year track record – and is seeing renewed interest from investors in the US and Europe at a time of increasing corporate activity.

The Cayman-domiciled Hadron Fund was launched back in October 2004. Since its debut, the fund has produced a total compound return of 139% for investors, annualising at 9.34%. The fund made 9.20% in 2013 and is up 7.55% this year to the end of June.

Hadron also manages a UCITS-compliant version of the same strategy, the Hadron Alpha Select Fund, which launched in April 2010 and is up by 6.56% for the year to date.

Hadron is led by CIO Marco D’Attanasio, who founded the firm with Giuseppe Di Cecio and Massimiliano Ciuchini in 2004 and was formerly a proprietary trader at Royal Bank of Canada (RBC). D’Attanasio previously ran his Hadron strategy while at RBC, making for an unofficial strategy track record that dates back some 16 years.

D’Attanasio describes his investment strategy as multi-asset-class long/short investing, with an event-driven style. The Hadron funds invest in catalyst-driven opportunities across a diverse range of asset classes, including equity, credit, merger arbitrage, convertibles, volatility and capital structure arbitrage investments.

"I’ve always been convinced that there is a strong advantage in having a bottom-up approach, being long/short, and having a holistic view of the capital structure – which means you better understand the risks and opportunities, so you can find the best place in the capital structure to position yourself," he says.

"This approach is becoming more and more relevant and useful in Europe thanks to the explosion of the public credit markets, as companies shift out of pure bank debt financing into those public markets," he adds.

"Financial markets are stabilising; they’re open for business again, so today you can find far more candidates for which there is public debt of relevance as well as public equity," D’Attanasio continues. "So it’s easy to understand why you get better results by looking at the whole capital structure, and it makes sense both from the long and the short side. You can play different parts of the same company off against each other, or you can simply play the company from the best angle."

The Hadron portfolio comprises three distinct investment buckets focused on long/short credit (mostly in high-yield), catalyst-driven long/short equity and arbitrage-style situations (merger arb, convertibles and other trades with non-linear properties).

"The three buckets are managed by three different portfolio managers, with clearly defined boundaries as if they were independent funds," explains D’Attanasio. "The PMs have clearly identified responsibilities for their individual portfolios. For example, if a bond trade goes badly, it’s down to the credit long/short manager."

That credit long/short manager is Ciuchini, a former RBC colleague and Hadron founding partner. The arbitrage bucket is managed by fellow founding partner Di Cecio, while D’Attanasio himself is responsible for the catalyst-driven equity bucket and, as CIO, is also responsible for overall asset allocation.

The Hadron Fund allocates assets between its three strategy buckets based on two 'levers’: gross portfolio exposure and relative strategy exposure.

When it comes to the gross exposure of the portfolio, "we find ideas, we implement them, and the gross goes up and down as positions come in and out," says D’Attanasio. "This is driven by macro factors, by the opportunities available, and by market conditions."

The second lever is more intuitive, and is based on determining which bucket best exploits an already perceived opportunity in the markets. Again taking the credit book by way of example, D’Attanasio explains that while there may be plenty of opportunities early in a cycle within stressed debt and debt refinancing, during the more mature stages of the cycle credit will typically offer fewer opportunities – whereas equity is likely to become more interesting as M&A activity increases.

As a result, capital flows between the three strategy buckets in a fluid and dynamic manner. "Our credit exposure is probably cut in half now, compared even with a year ago," observes D’Attanasio. "And recently we didn’t have even a single dollar in merger arbitrage, but it has previously been as high as 60%. Our best return by strategy – by a long way – has been merger arb, because we only do it when it makes sense."

D’Attanasio believes these clearly defined allocation buckets ensure clarity within the overall portfolio. "At the bottom-up level, there’s no risk of inconsistency: one idea is expressed one way," he says. "Everything has its place, and nothing we do falls outside of those three buckets."

A typical position accounts for 1-3% of NAV. "We’d rather work a bit harder and find more ideas than have too concentrated a portfolio," he explains. "We have five analysts, plus the three PMs looking at their own ideas, so that’s eight thinking heads."

The fund targets opportunities that are expected to play out over a time horizon of roughly six months – but in reality its average holding period is about half that. "We tend to apply fairly tight risk/return filters," says D’Attanasio. "If we have a 10% return target on a position with a six-month projected timeframe when we enter, but we make 7% in the first month, then the trade goes.

"It’s not worth holding onto it to make 3% in the subsequent five months. Instead we work harder to find more ideas, which make more money and spend less time in the portfolio."

The Hadron Fund has a global remit, and places an emphasis on western Europe. It has no sector bias and D’Attanasio describes the team as generalists who will look at almost anything.

Sectors are allocated to specific team members, who perform analysis and make recommendations for any opportunities they have identified across the capital structure. While the fund is able to invest in a broad range of instruments and securities, D’Attanasio says he aims to "keep it simple and liquid, with nothing too exotic".

Much has been made of a perceived uptick in European market confidence and corporate activity in recent months, with M&A on the increase as a result.

"There’s pressure on European companies, following the financial crisis, to actually do something about their underperforming businesses – and that often requires some form of restructuring," observes D’Attanasio.

"Monetary policies have created a strong focus on top-down investment ideas and top-down teams within the investment community," he continues. "Relative to the past, I feel there is less focus now on the specifics, the nitty-gritty details of companies – especially in the small and mid-cap space."

Hadron’s broadly market-neutral approach is another differentiator, he adds. "A big problem for the industry is that people feel they have to be very directional. When interest rates are as low as they are – at zero or close to zero – the returns available are lower, so alpha gets squeezed. There’s not enough alpha for the industry to latch onto; that’s a quantitative fact."

He continues: "The focus of our investment programme is 100% on finding alpha in specific bottom-up situations. The strategy is working well, and we think it will keep working well across the cycle."

With a long and healthy track record coupled with the ability to exploit the current rise in corporate activity, Hadron seems well placed to attract new investors and grow its asset base.

  David Sheppard
"European event-driven seems to be flavour of the month both in Europe and also, more significantly, with US investors," says David Sheppard, who has been the firm’s CEO since coming onboard last year.

Sheppard is a well-established figure in the European hedge fund industry, having previously set up Occam Asset Management alongside Thames River co-founder Jonathan Hughes-Morgan.

By joining Hadron, Sheppard has taken over responsibility for day-to-day running of the business and for driving growth – leaving D’Attanasio and the other founding partners free to focus exclusively on investment management.

When Sheppard joined the firm last September, it was managing $200 million across the Hadron Fund and its UCITS sister vehicle, Hadron Alpha Select. This figure has since risen to $385 million, with inflows split roughly 50/50 between the two vehicles.

Assets under management remain below the firm’s peak in early 2008 when, pre-financial crisis, it was running some $650 million. But flows are now very much heading in the right direction again.

While some 80% of new inflows have come from the firm’s traditional European stomping ground, an encouraging 20% share has come from US investors. "We’re on the cusp of getting a bit of pull in the US, and we’ve accelerated our marketing push in North America," says Sheppard. "There’s a growing wall of money trying hard to find a home in the event-driven space, but it’s having to do so on a measured basis."

He describes the US push as a long-term project, though. "It’s a cornerstone piece of work for the next five to seven years, because it will take time to gain those relationships – but with a 10-year track record, we’ve shortened the lead time considerably," he says. The firm estimates capacity for the investment strategy at around $1 billion.

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