The fund is based on Old Mutual’s UK dynamic hedge fund, but as it is a Ucits III fund, it cannot short stocks directly. Short selling is where fund managers make a profit by borrowing shares, selling them and buying them back when the price has fallen. Ucits III does not allow fund managers to short securities directly as hedge funds can, but the same effect can be achieved using derivatives. This is known as synthetic shorting.
The Old Mutual fund will combine top-down and bottom up approaches to stock selection and will take long positions mainly in stocks outside the FTSE 100 index. Fund manager Luke Kerr will look for companies that show potential for sustained above average growth, profit upgrades or a re-rating.
Kerr, who is part of Old Mutual’s UK mid and small cap investment team, has managed Old Mutual’s UK dynamic equity hedge fund since launch in 2005. He spent five years managing the Dublin based Old Mutual UK select smaller companies fund until December 2008 and was appointed manager of the Old Mutual UK specialist equity hedge fund in January.
Kerr can short up to 30 per cent of the portfolio using derivatives. For this side of the portfolio, he will look for stocks which display the opposite characteristics of those he selects for the long side.
Old Mutual says it is likely the fund will be fully invested on the long side in good market conditions, with just a few opportunistic short positions., In falling markets it is likely that the number of short positions will be increased.
Old Mutual’s UK mid and small cap team has a good reputation for stockpicking and has experience in shorting stocks through hedge funds. These may be important comfort factors given that a focus on smaller companies and the use of short selling increase risk in a portfolio.