Christopher Guthrie

Hedge fund manager shuns emotion in his decision-making.

Jade Hemeon 1 July, 2005 | 1:00PM
Chris Guthrie, president of Hillsdale Investment Management Inc. and co-manager ofHillsdale Canadian Aggressive Hedged, is wary of emotional biases and instinctive human traits that can influence decision-making. Instead, he puts his trust in quantitative techniques that are not only measurable but can be back-tested over long periods.

He has, however, devised ways to objectively measure market sentiment, and this information plays a role in his stock-trading decisions as well as the portfolio's short and long exposure.

"We believe that quantitative methods, systematic observation and simulation lead to rational decision-making and superior investment results," says Guthrie, whose team manages three hedge funds, a long-only fund and a large chunk of private and institutional money.

In addition, Toronto-based Hillsdale acts a sub-advisor toTwenty-First Century Canadian Equity and is one of three managers ofBluMont Canadian Opportunities. In total, Hillsdale manages more than $200 million.

With a five-year average annual return of 16% at May 31, the $28.7-million Hillsdale Canadian Aggressive Hedged stood third among 18 funds with a five-year track record in Morningstar's Alternative Strategies category. It raced well ahead of the category's median return of 3.8%, and also kicked dust in the eyes of the S&P/TSX Composite Total Return Index, which gained 2.5%.

Although Guthrie's goal is to beat the index by at least six percentage points, based on an average annual compounded return during a three-year period, his fund has performed impressively over shorter periods as well. It gained 26% for the one-year period, compared with 1.5% for the category median and 16.2% for the S&P/TSX index. The fund, which Guthrie has managed since inception in December 1999, has a minimum investment requirement of $150,000.

"We have at least a quarter of the portfolio in short positions at all times, but there is a cost in rising markets," says Guthrie. "It's like having insurance in case of a fire. You don't know when it will happen, but over a three-year market cycle the odds of needing it are very high."

The fund invests at least of 80% of its assets in a diversified selection of Canadian companies with market capitalizations of at least $100 million. Currently there is no foreign content. Guthrie maintains a net market exposure -- the difference between short and long positions -- of 30% to 70%, with short positions a minimum of 25% of fund assets.

Leverage is limited to a maximum of two times the value of the fund's assets, and no one position can account for more than 5% of the fund. Guthrie's biggest bet in any one sector is 15%, calculated as the difference between the value of his short and long holdings.

Guthrie acquired his investment perspective gradually. After earning a BA in administration and commercial studies at the University of Western Ontario in 1984, he began his business career as an exchange student working in the banking industry in Belgium and Portugal.

When he returned to Canada a year later, he took a marketing job with a small precision instrument company in Toronto, working on his MBA at night at York University. In 1986, he joined the brokerage McLeod, Young Weir as a data analyst and programmer. Investing caught his eye, so he dropped the MBA program to attain his CFA designation instead.

In 1987, he joined Computerized Portfolio Management Services Inc. in data analysis, becoming director of client services and marketing by the time he left in 1996 to found Hillsdale.

At CPMS he was involved in the design, testing and application of quantitative investment models for institutional clients, and saw the merits of objective analysis. "The models worked so well that after a while the idea of actually running money became more appealing than selling the models to clients," he recalls.

Guthrie doesn't interview corporate managers, or tour plants and properties. Instead, he bases decisions on a handful of factors that are measurable, such as valuation, sentiment, growth rates, volatility and relative strength. Valuation is based on various yardsticks, including price-to-earnings, book value and cash flow, and he looks for changes in these ratios relative to a company's historical patterns.

The entire fund portfolio is measured daily and "rebalanced and re-optimized" once a week, with new names, new weights and changes in leverage and short/long exposure. Guthrie prefers to have about 40 shorts and 40 longs, and his annual turnover averages about 200%.

Guthrie likes to match up every short sale with a long position in the same industry. For example, if he's short on an energy company doing badly, he'll be long on another one that's doing well, as a hedge against a rising oil price. "We know what a bad company looks like and what a good company looks like," he says, "and that's easier to figure out than where the price of oil or gold is going."

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Jade Hemeon

Jade Hemeon