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3 Dec 2008

Rival Hedge Fund Avoids Steep Loses through Downside Protection Strategies

Canadian hedge fund manager, Rival Capital Management launched the Rival North American Growth Fund and since 2007 it has gained more than 80 accredited investors and $15 million in assets under management (AUM).

Headquartered in Winnipeg, Manitoba, the hedge fund is focused on small/midcap Canadian as well as US growth companies, with up to $2 billion Canadian market cap and $10 billion US. Also under development by Rival Capital Management is the Rival North American RRSP Growth Fund, which will buy units in the underlying Rival.

The fund uses a combination of a technical and a fundamental approach, using a proprietary filtering routine that accesses a database of 8,000 US companies and 2,000 CDN companies tracking approximately 2,000 variables, focusing on leading industries and stocks within those industries. The fund also focuses on protecting downside risk through strategies to limit leverage and limit losses.

While the S&P/TSX SmallCap index is down 43.23% year-to-date (to Oct 31, 2008 ) the Rival North American Growth Fund has used its proprietary risk management strategies to keep its loses to a minimum (-9.82 %) during this unprecedented period of volatility and downward pressured markets. When asked about conditions that may cause the hedge fund to sell, CIO Tony Warzel said, "We normally look for a change or reversal in the underlying attributes that caused us to originally take a position in a stock. For example, if the momentum is slowing we can usually directly attribute the change in sentiment in one or more of our predefined triggers such as sales or earnings. The sell message can be very clear and come very quickly which is why we monitor our portfolio continuously and very closely."

"Because we keep our portfolio small we know each company well and we pay close attention to their chart action," Warzel said when asked about risk management, "We also have proprietary risk mitigation techniques and tools available to us. If warranted, we will use limits on the way up and the way down. In addition, we limit the size of each holding and will use shorts to counteract what we see as an overweight in a particular area. Once we generate alpha, we like to protect it. Therefore if we make a bad trade we work to exit quickly and minimize the downside. We have a 10% rule where if we are down 10% on an initial trade we sell out the position. Yes you can occasionally get whipsawed but that one rule alone has saved us an immense amount of pain this year. In addition, we do not add to losing positions, based on our style averaging down is something we avoid; given the market action this year that too has worked well for us." Warzel concluded.

Warzel has experience as a Small and MidCap Equity Manager, managing AUM in excess of $1.3 billion for a variety of funds.