The trust, which Plackett (pictured) runs with Ralph Cox, is classified as a hedge fund but is a straightforward long/short equity strategy, similar to others in the IMA Targeted Absolute Return and IMA UK All Companies sectors. The trust’s returns put it in the top-20 closed-ended vehicles since it was launched, but its volatility and max loss figures are a fraction of all those above it.
"BlackRock Hedge Selector, at less than £40m market cap, is probably the most under-appreciated trust in our view," Tepes said.
"There are not many strategies accessible via trusts or OEICs that have a better long-term track record."
"The strategy’s returns are among the best, but what sets it apart are its low volatility characteristics and, even more impressively, its uncorrelated profile, which hardly any other strategies offer."
The trust focuses on the smaller cap area of the market, where Plackett also invests through the Throgmorton Trust and to a large extent in his BlackRock UK Special Situations fund. Ralph Cox runs the open-ended BlackRock UK Smaller Companies fund.
According to figures compiled by Cantor, the underlying strategy, originally run on an offshore hedge fund, has produced annualised returns of 14.1 per cent since the master fund was launched in May 2004.
However, its worst loss over that time was 5.4 per cent and the trust has an annualised volatility of just 6 per cent.
The fund’s Sharpe ratio over that time was 1.7 compared with a 0.3 figure for the All Share and 0.61 for the Numis benchmark.
The portfolio did exceptionally well in 2008, returning 19.44 per cent while the FTSE All Share lost 29.93 per cent and the Numis Smaller Companies index (ex IT) was down 40.83 per cent.
The trust, which is domiciled in Jersey, was launched in its current form in September 2009. Our data shows it has made 33 per cent since then while the average investment trust of hedge funds has made 11.31 per cent and the average IMA Targeted Absolute Return fund 12.4 per cent.
Performance of trust vs sectors and index since Sep 2009
Source: FE Analytics
The trust stacks up well against the better-known Brevan Howard and BlueCrest Allblue hedge funds, which are often used by retail investors who want access to the uncorrelated strategies of the sector.
The trust’s returns since launch are superior to the 25.32 per cent of the BH Macro fund and 20.48 per cent of BlueCrest Allblue.
Performance of trusts since Sep 2009
Source: FE Analytics
BlackRock Hedge Selector has a lower volatility than the two hedge funds over the past three years as well.
One of the key attractions of hedge funds, targeted absolute return funds and long/short funds is their ability to provide uncorrelated returns.
This helps to lower the overall risk on a portfolio by ensuring that there is something that does not fall in value alongside its other holdings.
BlackRock Hedge Selector displays a correlation of just 0.23 to the FTSE All Share over the past three years, very low for an equity fund.
Brevan Howard and BlueCrest Allblue do display lower figures, however, the former -0.2 and the latter 0.03.
Source: FE Analytics
Plackett and Cox focus on growth companies that have good management teams, a good market position and a track record of growth or a catalyst for change.
On the short side, they look for poor management, commoditised industries, weak cash generation and a record of earnings disappointment.
Unlike many long/short portfolios, the managers retain a high number of short positions and high short exposure.
They currently have 88 longs and 93 shorts, and are positioned net long 40 per cent. This is at the upper end of their historic range, according to Tepes’s figures.
It has net long positions in all the sectors and it is these that have provided the majority of returns in recent weeks.
The simplicity of the strategy is one of the key attractions for Tepes: buying companies that the managers find fundamentally attractive and shorting those that they think are challenged and overvalued.
This sets it apart from many of its competitors such as Brevan Howard, BlueCrest Allblue and Standard Life GARS.
She also praises its discount control mechanism. The trust will redeem up to 20 per cent of its shares at NAV each quarter if it is trading at a discount. This has been implemented in each of the last two quarters.
