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In November 2020, Arancha Cano was selected as one of Hedge Fund Journal’s “50 Leading Women in Hedge Funds”. In this short Q&A, we explore Arancha’s views on long/short investing, including key lessons learned.
What differentiates your philosophy and process for investing in long/short financials?
In my view, financials are levered expressions of macro themes, including credit and rates cycles. Understanding the plumbing of the financial sector and its correlations with other asset classes creates opportunities to generate alpha. I believe my approach is differentiated because it combines the use of financial companies as a macro expression of global themes with a deep understanding of bottom-up fundamentals. I think this allows me to pick stocks that are better suited to changes in the cycle.
What key lesson have you learned about long/short financials investing over your career?
Crises like the COVID-19 pandemic and the global financial crisis (GFC) highlight a key lesson from my career investing in long/short financials: the impact of drawdowns. In times such as these, I believe capital preservation prevails above fundamental views. In my view, minimising the drawdowns on wide market dislocations is what makes a portfolio manager better over the long term.
How has the COVID-19 pandemic impacted your investment approach/opportunity set?
The COVID-19 crisis is a very different recession from the GFC. It has had much bigger GDP declines and unemployment and much faster policy reactions. Initially, most investors drew conclusions from the GFC. But we soon understood that, unlike the GFC, today’s crisis has produced very clear winners and losers. That dispersion has created significant alpha potential in my opportunity set — as has understanding the reactions of governments and central banks. Finally, factor investing has played a much larger role, and flows have become more important when sizing positions.
What’s next in the future of your opportunity set?
I have historically invested in a global and broad set of financial companies. This background has given me an understanding of macro cycles and how other asset classes perform in different environments. My next challenge is to expand to a broader set of stocks that are also correlated to macro cycles. I believe there are numerous synergies to leverage by looking at the underlying behaviour of corporates and consumers through the banking lens.
How does Wellington make you a stronger long/short financials investor?
Several factors attracted me to joining Wellington’s alternatives investment team. The firm combines deep macro expertise in rates, foreign exchange (FX) and credit, with one of the industry’s most experienced collection of equity investors. In my view, this new investing cycle will be led by investors who understand both the macro framework (fiscal and monetary), together with detailed bottom-up data from company research. In addition, I believe Wellington’s collaborative attitude is a differentiating model. For example, post COVID-19, our consumer team has given me a much better view of the credit and delinquency cycle. Their insights range from which companies are likely winners to the average amount spent by consumers.
What’s one piece of advice you have for investors new to long/short financials?
In my view, long/short investing is often best when there are big dislocations in the world, as it allows capital preservation to prevail. I believe giving up some performance on the upside, most of the time, can pay off on the downside. With this in mind, I think long/short investors should be excited to put ideas to work as I think we have entered a new regime shift for the next 10 years. With rate volatility suppressed for the long term, I believe equity remains a particularly compelling asset class.
Wellington Management did not pay a fee to be considered. Editors of Hedge Fund Journal selected 50 women to feature in their publication based on the biographies of the individuals. Inclusion in this publication is not indicative of Wellington Management’s past or future performance.
Please refer to this important disclosure for more information.
Please refer to the investment risks page for information about each of the following risks:
- Capital risk
- Concentration risk
- Liquidity risk
- Manager risk
- Equity market
- Long-short strategy
- Short selling
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