A hedge fund manager, Marcus Hughes, believes that betting against the market can lead to larger returns. He follows this strategy by shorting stocks of companies when insiders sell their shares. One example of this strategy is when Hughes shorted shares of Qantas after the former CEO, Alan Joyce, sold $17 million worth of shares in the airline. Hughes saw this as an opportunity to bet on a decline in the value of Qantas shares.
Hughes also pays attention to certain indicators of a company’s performance. For example, he mentions the underinvestment in Qantas’ fleet relative to its international competitors as a sign of the company’s turmoil in the market’s eyes. This proved to be prescient as Qantas now faces increased maintenance and running costs due to an aviation parts shortage.
The hedge fund’s strategy also includes investing in businesses that are founder-led and have attractive returns on equity. Hughes looks for businesses that spend more on research and development than on sales, as he believes this indicates a product that “sells itself.” One example of this is Life 360, a family tracking device company that has seen significant growth.
Another key aspect of the hedge fund’s strategy is maintaining a concentrated portfolio. Hughes emphasizes that LHC Capital’s top five positions have averaged about 50% of its capital over the past 12 years. This focus on a limited number of positions has contributed to the fund’s outperformance.
Hughes believes that the best time to buy a business is when the stock falls and it turns out there was nothing wrong with the business at all. He follows Warren Buffett’s advice to “pay a high price for a cheery consensus,” indicating that he looks for opportunities where the market’s perception diverges from the actual potential of a business.
Overall, Hughes’ strategy involves betting against the market, investing in founder-led businesses with strong returns on equity, and maintaining a concentrated portfolio. These tactics have helped LHC Capital’s Australia High Conviction Fund outperform the benchmark index.
Sources:
- The Australian Financial Review