Hedge Funds and Private Equity
HOLT’s methodology is used by hedge funds, private equity firms and other alternative asset investors to identify short-term tactical moves and longer-term strategies that fit a range of investment styles.
Helping a client avoid a poor investment in a declining industry
A hedge fund client planned to make a significant investment in an established company in a declining industry. HOLT consultants were asked to develop an objective second opinion on the company's strategy and its potential viewed against the landscape of the industry as a whole.
For the company and the industry, we:
- Did an aggregate analysis for the industry and confirmed that the market was pricing in a deterioration in returns and investment for the group of companies
- Evaluated reported financials for accounting irregularities
- Conducted a company “deep dive” analysis identifying the major operating areas in which the company deviated from industry norms, indicating potential performance risks.
The client not only reconsidered its investment in the company but also identified alternative investments within the industry that it had not previously recognized.
Broadening a fund’s reach through direct investments in undervalued companies
A private equity firm wanted to implement a new strategy for investing in firms that had lagged the market significantly.
Working with the client and leveraging the HOLT methodology, we developed a new screening process that:
- Highlighted well-managed firms with low market expectations, giving them significant upside potential;
- Used HOLT’s focus on cash to ferret out accounting quality issues and quantify the performance risk where relevant;
- Identified relevant companies in diverse geographic regions
The client identified new targets in sectors where they had been operating for years. They also decided to broaden their investments to industry sectors and geographic regions, which they had previously ignored.
Drawing a critical link between equity and credit markets
A hedge fund client needed to quickly assess what equity market prices indicated regarding a firm’s credit quality outlook.
Using HOLT tools, the client easily calibrated the equity market’s expectations for returns and growth. These expectations were then translated into implied levels of credit ratios.
The client determined that these implied ratios were inconsistent with the trading levels of the company’s bonds and credit default swaps. This new insight allowed the client to take a contrarian position.
If you’re a hedge fund manager or analyst and you’d like to learn more, please contact us.