Earnings revisions are key catalyst for returns, argues Arkos Capital’s Mondani

The ‘non-directional’ strategy for obtaining alpha, including a focus on earnings revisions, is the best way to negotiate currently choppy investment waters, according to Lugano-based manager Gianmarco Mondani.

Gianmarco Mondani (pictured), chief executive and founder of Arkos Capital, a hedge fund manager based in Lugano, Switzerland (now part of the GAM group), first developed an interest in hedge funds when working as a long-only fund manager in Edinburgh. As a strategy, the long-only asset class did not convince him. The acid test is always whether the fund manager is prepared to put his own money in the funds he managed: Mondani didn’t.

The experience left him looking for a better way to invest assets. But the mainstream hedge fund strategies didn’t impress him either. The average hedge fund, he says, has a high beta content, with little alpha generation.

In his quest for a fund that he would be happy to invest in, he took a close interest in behavioural finance. From his research, it became clear to him that GARP (growth at reasonable price) is not conducive to alpha generation. Under this system, he says, “you are trading on where the stock is currently, not where the stock potentially could be in the future”.

A critical flaw in this system is that the investment decision is often reliant on second-hand information from brokers. Not only is the information of “poor quality”, as Mondani says, but it is also out of date and therefore backward-looking. The idea forming in his mind was to create a non-directional fund, where returns are entirely driven by alpha.

Winners and losers

Mondani is keen to stress that his fund is ‘non-directional’, rather than ‘market neutral’, as some might suppose. By this, he means that he and his team do not run quantitative strategies and that, while they strive to reduce the beta exposure of their strategies as much as possible, their positions are not neutral on sectors and geographies.

It is a strategy that has performed well in the current top-down, macro-driven market. Recent research suggests that macro factors force up the correlation between stocks. Despite this, the Arkos earnings revision strategy can still pick out the winners and the losers.

Mondani says: “Our non-directional approach will prove an effective way to navigate through today’s choppy financial markets, which will continue to be volatile, dominated by macro news, leading market participants to alternate between risk-on/risk-off strategies.”

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