Outlook for Global Long/Short Equity Investing

Daniel Piderit Hernandez:

Thanks for having me, Elana.

EMS:

Absolutely. So to kick off the conversation, tell us a little about the firm and how you got to where you are today.

DPH:

Sure, sure. So in terms of a little bit of background, I'm originally from Caracas, Venezuela. I moved, I migrated here to the US with my family at age 14, really escaping the oppressive regime of Hugo Chavez at the time. And I started my career on the Goldman Sachs trading floor in New York during the summer of '08. So that was an interesting time to start out, which I think kind of molded me into having that risk management kind of priority focus from an early start. So posterior to Goldman, I have worked at hedge funds for the last decade plus covering both developed markets and emerging markets.

So I launched DPH Capital in early 2022 after 15 years in the industry, combining a broad set of experiences to develop my own investment strategy and refine my own investment processes that led me to the launch. DPH Capital is a long-short equities fund that capitalizes on certain recurring market inefficiencies through disciplined fundamental value analysis and a deeply contracting approach to investing both globally and across industries. The strategy has a meaningful allocation to Latin American equities as one of its key differential factors to other global managers and the funds GP is 100% minority-owned and managed.

EMS:

Great, Daniel. So given your focus on global long-short equity investing, love to hear your overall outlook for the space.

DPH:

Sure. So I find it super interesting. I didn't time it in terms of me launching the fund last year, but I feel like it's actually a space that is going through a transition and very favorable one at that. You know, long-short has been out of favor for many years due to, well, it was a runaway bull market that was boosted by interest rates set at zero, right? And shorting anything was destructive to returns for a long time and therefore many allocators kinda gave up on it on the space. But in this new paradigm of non-zero rates I see long-short is making a big comeback because there's a more clear differentiation of business winners and losers as companies must now actually compete for capital and generate returns on that capital.

However, as we look forward, I believe it's safe to say that the era of zero and negative interest rates is categorically over. So this means that that rising tide that lifted all boats for the last decade plus championing passive indexing and lever long beta investing seems likely to have reverted to a more normalized environment where business models matter again, and this makes it possible again to create alpha on both long and short investments, which makes the long-short space a lot more interesting to stabbing investors to rotate back into, I believe.

EMS:

And Daniel, more specifically, in your space, what are some of the greatest opportunities you see and why?

DPH:

Sure. Interesting enough, so we do cover a lot of ground being a global strategy. As I mentioned, we have a meaningful allocation to Latin American equity, just given my expertise in those and just so happen that I believe currently the region of the world where I see the most opportunity is Latin America. I believe that American equities provide some really attractive opportunities right now because from a macro perspective, these economies were actually earlier than the developed markets in rising rates to combat inflation. So now there'll be earlier as well in lowering rates and therefore boosting equity returns. Also more structurally, it has been my experience that these are less follow markets, less efficient and more volatile, and all of this really lends itself for more alpha to be captured. So I would highlight really quickly just two specific countries in Latin that I think look attractive in terms of opportunities today, it'll be the two largest economies in Latin actually.

So Mexico, the number two economy in Latin, I think it's a huge beneficiary of the nearshoring impulse by US companies bringing supply chains closer to home. Mexico is our next door neighbor with already solid trade agreements already in place and a very economic and educated labor force available. So you might have read in the newspapers recently that Mexico has recently overtaken China as the US number one trade partner. So this nearshoring trend is not just some theory, it is happening and we're still very early in it still. So I believe that that's a huge trend to watch and an opportunity for the country.

And then secondly, Brazil, Latin's largest economy, has near the highest real interest rates in the whole world with the policy rate still above 13%, yet inflation has already plummeted to down to 3%. So that means the Brazilian Central Bank has plenty of room to cut rates, stimulate the economy, yet not hurt the currency given that high real rate, differential cushion that it has to work with. I also think that after a tumultuous change in the country's presidency early this year, the market is starting to feel more comfortable that there are checks and balances in the political system to prevent any drastic changes on the economic side or any specific sector regulation. So this should really bring a reduction in the Brazilian equities risk premium leading to a rerating from a rather depressed valuation levels currently. So those are two examples of what I'm seeing opportunities in the region right now.

EMS:

Daniel, on the other hand, what are some of the greatest challenges you face in your investing space?

DPH:

Sure, sure. So on the opposite end, I would point to China. I am concerned about China. It definitely faces some difficult demographics with its population already net declining in 2022 for the first time. It also faces an overbuilt property market that used to be the economic growth driver for many years. And as I mentioned when talking about Mexico just now, the nearshoring or deglobalization trend will continue to hurt China as this will be a multi-year repositioning by global corporates. So I think at the same time, China seems to be tightening regulatory pressures across several industries, scaring away some capital, not to mention the geopolitical risk with the situation with Taiwan, that could be so uncertain. So overall, I think China faces many headwinds that will be hard to reverse. I like expressing this view mostly through shorting certain commodities that China's demand concentration and demand contraction will affect the most.

EMS:

Daniel, to shift gears a little bit, wanted to discuss ESG, DEI, which are top of mind for the investment industry right now and would highly welcome your thoughts of how your firm is integrating these important topics.

DPH:

Absolutely. I think it is a very important topic. A figure that not a lot of people know is the percentage of assets that are managed by minorities and women in the industry. And that according to the Knight Foundation studies, that's out of the entire assets under management in the US being managed by either minorities or women. It's only 1.4% of all the assets. So I think there's a lot to work to do. I think it all starts with more acknowledging and knowing about it. So in terms of the company's structural level, DPH Capital is 100% minority-owned and managed. And furthermore, diversity is a vital aspect of our team-building planification for the future and an integral part of our core values.

As for ESG, despite DPH Capital not marketing itself as an ESG fund or an impact fund, there's no doubt that ESG is deeply integrated into our company research process. And ESG considerations can often be a key driver in our investment decision making. That is because even without having an ESG mandate per se, higher ESG global awareness is an inescapable fact and it impacts certain companies and industries in meaningful ways, strictly economically speaking, which therefore renders this study of ESG as a critical factor in our investment analysis process.

EMS:

Daniel, we've covered a lot of ground today and wanted to see if you have any final thoughts you'd like to share with us.

DPH:

Sure. So the fund officially launched in May of 2022, and the first year of DPH was all about focusing on the portfolio construction and ensure as much as possible that the first year track record got off to a strong start, which I'm pleased to say we've certainly accomplished. So now this second year of operations where DPH is partly about making a more concentrated effort on sharing the investment opportunity and opening up to welcome new investors and always focused on bringing in only high quality long-term LPs that are aligned with our investment strategy. Along with that, we're also focused on growing our team and strengthening our resources to boost our alpha generation as well. So a lot of exciting stuff going on, and there's definitely a lot to look forward to.

EMS:

Daniel, I wanted to thank you so much for sharing your perspective with our listeners.

DPH:

Thank you so much, Elana. Thank you for having me. It's been a pleasure.

EMS:

And thank you for listening to the EisnerAmper podcast series. Visit eisneramper.com for more information on this and a host of other topics. And join us for our next EisnerAmper Podcast when we get down to business.

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