We believe that excessive diversification inside a portfolio leads to an increase in the level of unknown risk (or market risk). The fund therefore makes concentrated investments into companies in which the manager believes it has a sustainable competitive advantage through extensive knowledge and research. Our investment objective is to provide investors with a targeted return on their capital by implementing a focused investment strategy that contains only our high conviction ideas. The fund actively seeks to avoid the dilution of its high conviction investment ideas by limiting the number of investments held in the portfolio. Our investment decisions are based on our own in depth investigation of the chosen industries and are based on our assessment of the risk/reward symmetry of outcomes, rather than by following the more conventional theories of portfolio construction.
The fund is predominantly invested in equities and equity related derivatives but may also invest in other parts of the capital structure. The fund targets investments in both private and listed companies, with a special focus on private companies that are intending to list in the not too distant future. We place a heavy reliance on proprietary research and we screen each investment according to our assessment of the risk/reward symmetry. Derivatives are generally used to reduce risk or to leverage up a position without increasing downside exposure. Models are constructed to provide objective valuations of various securities. In addition, the team often engages with management of companies that are current or potential investments in order to form independent assessments of their investment merit. Whilst we do not seek operational involvement in our investments, we are happy to assist with the raising of further capital, both debt and equity, which ultimately will help us to increase the return on equity.
Whilst there is no assurance that our investment approach will be successful, a rigorous, disciplined approach to risk management is followed. Predetermined capital controls are put in place prior to every disbursement and are stringently applied. Risk management evaluation tools are available to the team on a real-time basis. The fund may make use of hedging techniques to limit the impact of systematic risk (or general market risk) and to manage the overall exposure within the portfolio. The most effective risk mitigation factor stems from the fact the management team themselves are the largest investors in the fund. A significant part of our personal wealth is at risk inside the fund, alongside the capital of our investors.