ABOUT
Incentives in the asset management industry are often misaligned.
Management fees structured as a percentage of Assets Under Management incentivise asset gathering instead of investment performance. Strategies with superior risk/return profiles are often overlooked if their scalability is limited.
For Harvest Lane, it presents an opportunity. Our fee structure prioritises positive performance. We target superior risk adjusted returns with a focus on capital preservation, and our size is limited to our opportunity set and not beyond it.
“Investors should always keep in mind that the most important metric is not the returns achieved but the returns weighed against the risks incurred. Ultimately, nothing should be more important to investors than the ability to sleep soundly at night.”
– Seth Klarman
“In past reports we have told you that our insurance subsidiaries sometimes engage in arbitrage as an alternative to holding short-term cash equivalents. We prefer, of course, to make major long-term commitments, but we often have more cash than good ideas.
At such times, arbitrage sometimes promises much greater returns than Treasury Bills and, equally important, cools any temptation we may have to relax our standards for long-term investments.”
– Warren Buffett, 1988 Berkshire Hathaway Investor Letter
STRATEGY
Corporate activity is a rich source of investment returns and encompasses a multitude of opportunities – takeovers, mergers, asset sales, demergers, and restructurings, amongst others. Opportunities are often mispriced as the strategy is viewed as unattractive by larger professional managers (typically owing to capacity constraints) and as such, often ignored.
Within a well-constructed portfolio of such opportunities, the performance of each position becomes largely driven by stock specific factors rather than broader equity market movements and macroeconomic influences. The benefit of a portfolio constructed entirely from such opportunities is that not only does it exhibit minimal correlation to market indices, but minimal correlation within the portfolio itself. Appropriately managed, it is a strategy characterised by attractive risk adjusted returns, capital preservation, and true diversification.
Over the last decade we have constantly refined a strategy that encompasses everything from opportunity identification though to position crystallisation. The investment strategy works hand in hand with risk management at the portfolio level to ensure each position is risk weighted appropriately to the transaction specifics, which is key to extracting optimised performance. Our experience and robust investment process sees us well placed to assess all relevant variables for a given transaction and compare available returns against those risks in order to determine if a position should be included in the portfolio and if so, at what level of exposure.
