What is Upslope’s strategy?
Upslope’s core long/short (“L/S”) strategy is similar to a classic equity hedge fund: long/short, concentrated, and focused mostly on midcaps in developed, global markets. We tend to have some concentration in two unrelated sectors that the portfolio manager has a background in (packaging and exchanges/brokers).
What is Upslope’s typical “net” and “gross” exposure?
Since inception, Upslope’s exposure has averaged just over 40% “net” and 100% “gross.” Net exposure is calculated as: % of portfolio invested in longs minus % of portfolio that is short. How I think about net exposure: “if we are 40% net long, our returns should be about 40% of what the broader market does – if I do a highly mediocre job of picking stocks.”
Gross exposure is defined as: % of portfolio invested in longs plus % of portfolio that is short. When gross exposure is over 100%, I consider the portfolio to be levered (i.e. investing more dollars than clients actually have). I am comfortable with modest leverage (up to 125%) — given our typically low net exposure — but remain clear-eyed about the fact that higher gross exposure still = higher risk.
You mentioned concentration in packaging & exchanges – why?
I never would have guessed it, but these are two excellent sectors to cover for L/S equity investing. A reminder of my background: I covered exchanges and brokers as an investment banker for several years before transitioning into equity research. In research, I covered the (mostly non-paper-based) packaging sector and worked under a 30+ year industry veteran, who is a living encyclopedia on the sector.
What’s so great about these seemingly random sectors? First, and lucky for me, they are uncorrelated to each other. Second, the packaging sector has an impressively wide range of businesses in terms of overall business and managerial quality, cyclicality and leverage. There is always something to do in packaging-land on the long and/or short side (usually both). Third, exchanges/brokers are unique in that many are (a) monopolistic (i.e. strong competitive advantages), and (b) have leverage to volatility. I believe this unique combination makes them an attractive hunting ground – mostly for longs – with a near-permanent slot in a portfolio.
Can you do anything outside of packaging and exchanges?
Of course. While our top three contributors to performance since inception (through Q2 2019) include two exchange-like businesses and a packager (at least in part a function of relative sizing), the next seven are stocks outside of those sectors. In aggregate, attribution from the top three was about equal to the next seven.
What won’t you touch?
With rare exception, we tend to avoid pure commodity businesses and more technical biotech and healthcare. I also have a rule of thumb that “if it trades on EV/Revenues, I am probably not interested.” This eliminates companies that tend to be (a) aggressively tech-oriented (i.e. I have a hard time really understanding the nuances of the business model), and (b) not profitable.
What is your edge?
Upslope has four main sources of competitive advantage: (1) Nimble. Upslope is more nimble than most active managers – both in the sense of AUM vs. strategy capacity and liquidity – and, in our ability to make quick decisions without overly-bureaucratic processes. We can make and act on informed decisions quickly and with minimal impact on prices. (2) Common sense first. I wouldn’t claim to have an informational advantage, but I do firmly believe Upslope’s “investment committee of one” provides a unique perspective and flexibility not afforded to large institutional managers. Ideas need not be “perfectly pitchable” at Upslope. The balance of prospective returns simply needs to outweigh the risks. (3) Unique sector expertise: our focus on two relatively small, niche sectors has been a material positive to date. I believe this will continue to be an advantage, even as I work hard to expand our circles of competence over time. (4) Independent mindset: being based in Colorado – far away from the NYC “ideas dinner crowds” is a real advantage, in my view, in constructing and maintaining a differentiated, uncorrelated portfolio. I take great pride in this.
Standard TERMS & STRUCTURE
What is the standard fee structure?
“Qualified Clients” may choose between: (a) 0.75% (annual) management fee + 17.5% performance fee (with high-water mark), or (b) 2.0% management fee. All fees are billed quarterly in arrears, given (effectively) on-demand liquidity. For non-Qualified Clients, our fee structure is simply a 2.0% management fee.
Are incentives really aligned with that fee structure?
I believe so. Stepping into a prospective client’s shoes, I’d worry about a portfolio manager: (1) taking too much risk to earn their performance fees, and/or (2) not taking enough risk if they can be fat and happy just earning recurring management fees alone.
Where possible, Upslope’s fee structure is intentionally tilted to performance fees. In my view, our management fee is notably below market and our performance fee is at or slightly above market. This structure incentivizes me to take risk and achieve higher absolute returns. As a counter-weight, I am also heavily incentivized to protect capital and not take undue risk – due to the fact that the vast majority of my investable net worth is invested right alongside clients.
What are the (liquidity) terms?
No lock-ups. I aim to bring on like-minded clients interested in investing with Upslope for the long-term. But, I am not interested in imposing formal liquidity restrictions. The vast majority of our investments have historically been highly liquid and I see no reason to keep clients from accessing their money if they really want/need it.
What is your minimum investment for new clients?
Do you make exceptions?
I’d rather not, but can be convinced in certain special circumstances.
Do you accept IRA money?
Yes. A small sub-set of AUM is comprised of IRA accounts that are managed using a modified long-only (“L/O”) version of Upslope’s core strategy. This is because IRA accounts cannot be structured as traditional margin accounts, which means…no shorting.
The L/O portfolio typically includes all of the longs from the L/S portfolios – but, with different sizing (highest conviction names are generally bigger and more concentrated; lowest conviction names are under-weighted). From inception to Q2 2019, the long-only strategy has had an average cash balance of ~30%. It has outperformed the L/S strategy, while downside volatility has been slightly higher.
Why are you structured with SMA’s instead of a pooled vehicle? What are the benefits/drawbacks?
Transparency (for clients) and cost (for me), mostly. When I first launched Upslope, I assumed most rational people would have a hard time trusting “some guy in Colorado” to manage their money – especially in a vehicle with limited liquidity and transparency (as is the case with most GP/LP structures). With SMAs, clients have their own separate accounts maintained in their own names at Interactive Brokers. Clients have full transparency into what they own and can regain trading authority (revoking Upslope’s) simply by calling Interactive Brokers.
Cost was the other consideration. The all-in operating cost for SMAs is materially lower than for a comparable pooled (GP/LP) vehicle. Admittedly, the benefits here mostly accrue to Upslope. Given my goal of establishing a multi-year track record before scaling the business, this was an important consideration.
Of course, there are drawbacks. While we are not tax advisers (and you should consult your own here, rather than taking my word for it), generally there are certain tax advantages that may be available under GP/LP structures that are not available with SMAs (e.g. certain investment management fees can be tax deductible for the client).
All in all, I believe our competitive fee structure and the benefits of transparency and liquidity more than outweigh the drawbacks with regards to tax efficiency. Nonetheless, it’s a topic about which I remain open-minded.
Who is your current client base?
Today, it’s mostly high-net-worth individuals. It started as mostly friends and family, but has expanded to include other individuals – most of whom are employed at other investment management firms. One of the funny things I’ve learned is Upslope’s “pitch” resonates far more easily with those already in the industry: they ‘get’ the nuance around L/S performance bench-marking and the general value of active management. Many are also restricted with what they can do in their personal investment accounts.