May 2019 IssueLong scroll reading

Balter Invenomic (BIVRX/BIVIX/BIVSX)

By David Snowball

Objective and strategy

Balter Invenomic Fund is seeking long term capital appreciation. They pursue that through a widely diversified long-short portfolio comprised, primarily, of domestic stocks. The long and short portfolios each held about 150 positions, as of early 2019. The long portfolio is always fully invested in undervalued, timely stocks while the size of the short portfolio varies based on the opportunities available. The long portfolio is all-cap and might include equity securities other than just common stocks. The fund’s short portfolio is broadly diversified and targets stocks which are both overvalued and are likely to fall. The short portfolio is not designed merely as a defensive buffer; it is designed to deliver positive returns and reduce the overall risk of the portfolio through individual security selection.

Net equity exposure (percentage long minus percentage short) averaged 30% over the past three years. Among the tools available for hedging its equity exposure are investments in high-yield bonds and options.

Adviser

Balter Liquid Alternatives, LLC. Balter, which is headquartered in Boston, was founded in 2006 and oversees approximately $1.3 billion in total assets, including approximately $300 million in alternative mutual funds. They serve family offices, ultra-high net worth individuals and institutional investors. Balter Liquid Alternatives partners with established hedge fund managers to provide hedge fund strategies in a mutual fund form.

The fund is sub-advised by Invenomic Capital Management, LP. Invenomic was founded in 2015 to provide investment management services to institutional clients and high net worth individuals worldwide. The firm has three investment professionals and about $160 million in assets, of which about 10% are from non-US investors.

Manager

Ali Motamed. Before launching Invenomic Capital, Mr. Motamed was a Senior Analyst and a Portfolio Manager with Robeco Investment Management (2003-15) where he co-managed Boston Partners Long/Short Equity Fund (BPLEX) and a related strategy. He was awarded Portfolio Manager of the Year in the Alternatives Category by Morningstar in 2014.

Mr. Motamed is assisted on the business side by Bob Marx and on the investment side by two analysts, Paul Goncalves Jr. and Nate Victor. Mr. Motamed was looking for bright and ambitious younger colleagues and screened, in particular, for analysts who had voluntarily pursued the rigorous, multi-year process of becoming a CFA charterholder. He found that in Mr. Goncalves, who has experience analyzing cyclical businesses, and Mr. Victor whose specialty is in tech. They expect to add a third analyst, with particular strengths in computer sciences, in June 2019.

Strategy capacity and closure

The strategy capacity is about $3 billion, but only $1.8 billion of that is allocated to the mutual fund. The remainder is reserved for other institutional and international investors; Mr. Motamed reports a potential allocation of $600 million to a large European UCIT provider. The strategy currently holds $160 million.

Management’s stake in the fund

Mr. Motamed has invested more than $1 million in his fund. His Balter confreres each have reasonably large investments in the fund, though none of the fund’s trustees have any investment in any of the Balter funds.

Opening date

June 19, 2017

Minimum investment

$5,000 (BIVRX), $50,000 (BIVIX) and $50 million (BIVSX). The Super Institutional BIVSX share class will probably be capped at three or four investors, one of whom has already approached the advisor.

Expense ratio

2.98% for Investor class, on assets of $141 million. Institutional shares charge 2.73% and Super Institutional shares cost 2.48%. For the Institutional share class the funds expenses are capped at 2.23% and 1.99% for the Super Institutional share class.

Comments

Things are going well for the folks at Balter Invenomic.

Ali Motamed manages Balter Invenomic Fund (BIVIX), which launched in June 2017, but he’s been playing this game for far longer. Mr. Motamed was Co-Portfolio Manager of the Boston Partners Long/Short Equity Fund (BPLEX/BPLSX). In that role, Mr. Motamed was awarded Portfolio Manager of the Year in the Alternatives Category by Morningstar in 2014. Like many fund entrepreneurs, he chafed under the constraints of working within a large, bureaucratic organization. In October 2015, he left Boston Partners and founded Invenomic Capital Management with the intention to advise individuals, advisory firms, family offices, endowments, foundations, trusts, charitable organizations, and pension plans in an investment capacity.

What does “invenomic” mean? Good question. It’s a term invented by Mr. Motamed to try to capture his investing philosophy. The INVE represents investing. The NOMIC part means “having the general force of natural law”. It’s the suffix in economic and socionomic. He named the firm Invenomic because he views the firm’s investment strategy as a technologically enabled version of the original hedge fund structures that were based on fundamental analysis.

Mr. Motamed believes strongly that fundamental analysis is the most time-tested method of investing. However, as human beings, we are not as efficient as computers and have the prospect of falling into behavioral traps, perhaps repeatedly. The solution is a quantitative system that creates structural safeguards against human frailty. By way of example, many professional investors revel in all of the contact they have with management teams. Mr. Motamed and his team, contrarily, stay as far from management teams as possible:

Generally speaking, companies whose stock we short are led by excellent communicators with charm and charisma. Their job is to create value for their shareholders, and having an overvalued stock should be a badge of honor. Very rarely do the leaders of these companies end up going to jail. What they do, however, is selectively disclose information that positions their company in a favorable light.

Invenomic’s solution is to maintain rigorous four page statistical profiles about each firm in its universe, where each of the data points illustrates something about a firm’s prospects that is more revealing than their management team’s sweet words. The goal is to use a rich array of data because there are, Mr. Motamed argues, “many paths to ‘value.’ There are companies that on their own intrinsic basis can justify a higher valuations; too many investors fret about p/e which is an invariant metric. We take a slightly broad definition with a tight process to evaluate 4,000 companies, which allows us to be value oriented without being doctrinaire, especially in the context of our short portfolio.”

The key differentiator, from his perspective, is a successful short book. Mr. Motamed argues that most long/short managers fail on the short side. They maintain too few shorts, they put too much money into each, they maintain a large short book when market conditions don’t warrant it and they view themselves as on a crusade against the management teams. Each of those mistakes limits the power of the short portfolio to generate alpha rather than just limiting beta; that is, Mr. Motamed thinks a good short portfolio should make money rather than just hedge volatility. They target “story stocks,” firms with deteriorating fundamentals and firms artificially buoyed by one-time windfalls that investors are treating as structural advantages. The goal is not to find the most overpriced stocks; the goal is to find stocks that are both overpriced and poised to fall. He reports that there are more money-losing stocks in the Russell 3000 index than at any time in history, which offers a rich opportunity set.

The fund has, since inception in June 2017, been a remarkably strong performer. And while performance over a couple years can prove nothing, it can certainly point out some interesting and promising prospects.

Here those are. Out of the 129 diversified long/short equity funds in Lipper’s database, over the 18 months through 3/31/2019 – the longest measure period available to us, since the fund has not yet reached its two-year anniversary – Balter Invenomic is in the top tier in returns, in risk control and in risk-return metrics.

  Absolute value for BIVIX Relative strength
Annual returns 10.9% #2 of 129
Maximum drawdown 4.3% 11
Standard deviation 8.3 35
Downside deviation 3.8 13
Downside capture 9.5 10
Sharpe ratio 1.09 1
Martin ratio 4.9 3
Sortino ratio 2.38 1
Ulcer Index 1.8 10

Data from Lipper Global Data Feed at MFO Premium. Results exclude long/short sector funds. Results current as of month-end, March 2019.

How do you read that? Returns measure the fund’s upside for the period mentioned, while the next four measure its downside: deepest decline during the period, normal volatility, “bad” volatility and percentage of the S&P 500’s losses that it “captures”. The remaining four reflect the state of the balance between return and risk; Sharpe is the most widely-followed metric, Sortino is a bit more risk-averse and Martin is the most risk-averse of all. The Ulcer Index combines means of how far a fund falls and how long it takes to recover; funds that fall a lot and stay down tend to give their investors ulcers, hence the name. For the period we’re measuring, Balter is a top 10% performer in virtually every measure.

One important, but less known, measure of the risk-return balance is a fund’s capture ratio. It simply divides the size of a fund’s upside capture by its downside capture. As my colleague Charles Boccadoro notes in the definitions at MFO Premium: “Capture Ratio is simple the ratio of Upside to Downside Capture. Values greater than 1.0 means that a fund capture more upside than downside compared to its reference fund … a good thing!”

Capture ratio: top 10 long/short funds by 18 month Sharpe

  Capture ratio
Balter Invenomic 4.89
Saratoga James Alpha Managed Risk Domestic Equity 1.82
MFS Managed Wealth 2.17
Reality Shares DIVCON Dividend Defender ETF 1.27
AMG FQ Long-Short Equity 1.34
Gotham Defensive Long 500 1.16
PIMCO RAE Worldwide Long/Short PLUS 1.15
Gotham Enhanced 500 Plus 1.08
Gotham Absolute 500 Core 1.14
Gotham Enhanced 500 1.07
Average of funds 2 – 10 1.36

These are the ten best diversified long/short funds in existence, based on their risk-adjusted performance (Sharpe ratio) over the past 18 months. For every unit of risk, Balter captured 4.89 units of return. In contrast, the next-best fund was barely one-third as efficient and the average of the other funds in the top ten was less than one-fourth of Balter’s.

And the long/short universe as a whole? More than 100 of the 129 long/short funds were underwater: they captured more of the index’s downside than they captured of its upside. Caveat emptor, indeed.

Bottom Line

Invenomic has had an exceedingly promising start and investors have noticed. Mr. Motamed reports that they are the second fastest-growing fund behind a PIMCO offering. That has mostly been driven by family offices and RIAs, though they’ve recently launched a “super institutional” share class to better serve the prospect of a handful of quite large new investments.

Their approach is distinct (their correlation to the seven other top-performing long/short funds is just 51), their strategy is disciplined and their manager is well-tested. On whole, investors anxious about both preserving capital and generating positive returns in turbulent markets should consider putting Balter Invenomic high on their due-diligence list.

Fund website

Balter Invenomic (BIVIX). For reasons unexplained, only the Institutional share class is represented on the Balter website, leaving out the Investor and new Super Institutional options.

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About David Snowball

David Snowball, PhD (Massachusetts). Cofounder, lead writer. David is a Professor of Communication Studies at Augustana College, Rock Island, Illinois, a nationally-recognized college of the liberal arts and sciences, founded in 1860. For a quarter century, David competed in academic debate and coached college debate teams to over 1500 individual victories and 50 tournament championships. When he retired from that research-intensive endeavor, his interest turned to researching fund investing and fund communication strategies. He served as the closing moderator of Brill’s Mutual Funds Interactive (a Forbes “Best of the Web” site), was the Senior Fund Analyst at FundAlarm and author of over 120 fund profiles. David lives in Davenport, Iowa, and spends an amazing amount of time ferrying his son, Will, to baseball tryouts, baseball lessons, baseball practices, baseball games … and social gatherings with young ladies who seem unnervingly interested in him.