With the price of crude oil remaining stuck at around $50 per barrel this year, the fund’s energy analyst identified several oil firms which Mr Irish said were “consistently over-optimistic” on the likelihood of new oil discoveries being converted into profitable ventures.
The analyst also compiled a database of company executives, oil and energy analysts and auditors who had a tendency to over-predict the value of these new discoveries. The fund then shorted any firm in which these individuals were involved.
Mr Irish emphasised that returns from these short positions would have occurred irrespective of the price of oil.
“We were minimising the risk of forecasting [the oil price] and maximising the risk of idiosyncratic behaviour,” he said. But he accepted that the low oil price had quickened the demise of some firms in the sector.
An average of one short position per month in the fund has gone bust in 2015 thus far, the manager claimed.
He noted of the database: “If you follow these rogues around, they pop up remarkably frequently.”
At the beginning of the fourth quarter Mr Irish and Mr Burbeck’s portfolio had more than 12 per cent gross exposure to energy shorts.
The move follows a decision made at the start of 2015 to shift from long positions in healthcare in favour of shorting a variety of energy companies.
The move culminated in the managers shorting more than 60 global energy stocks, particularly upstream discovery firms where cheap capital had been misused.
The vehicle had a peak of 15 per cent gross exposure to healthcare longs in October 2014, which had dropped to 7.5 per cent by August 2015 – its smallest sector allocation.
The managers originally allocated long healthcare positions on the basis of hospital firms, health maintenance organisations and insurers benefiting from president Barack Obama’s flagship healthcare reforms, extending insurance cover across the US.
Mr Irish said equity markets did not initially price in the effect the law would have in removing bad debts for hospital companies.
“We had a lot of ideas in healthcare that worked well from 2012-2014,” he said.
“[But] by 2015 valuations were too high for the healthcare sector, and a lot of the news behind our investment thesis was priced in by other investors.”
Since inception in 2012, the fund’s energy short exposures have contributed more than a fifth of total returns, while long healthcare has added just over a tenth.
The vehicle has 125 long positions, 98 per cent of which crossover with the company’s long-only global equity fund.
The managers also hold 201 short positions, meaning the portfolio had a net exposure to global equities of just 14 per cent at the end of October.
Mr Irish said: “The diversity of the short book is an enabler of low volatility in the fund. It means we borrow less stock [per holding] and it is scaleable, which allows [us] to be more fundamental in our shorts selection and ride out market noise.”
The managers said they expected their short book to continue to grow in proportion to their long book in the next year. However, they remain net positive on Japanese equities.
In sterling terms, the fund has returned 31.6 per cent in the three years to December 7, compared with the average return of 27 per cent from its offshore Ucits hedge fund peer group, data from FE Analytics shows.
But performance has lagged in the past year, with a return of 2.2 per cent versus the sector’s average of 10.8 per cent.