Barrage Capital : The One Direction of Hedge Funds

Montreal Buffett disciples with intriguing performance.

I feel like Charles Darwin landing in the Galapagos Islands because I have found a truly rare creature: a mainstream hedge fund that has outperformed the S&P 500 since 2013. Don't worry, I will still find ways to denigrate it, but on the surface, Barrage Capital has delivered compound returns of 16.88% after fees vs 16.40%, in C$ including dividends for the S&P 500. (Kudos to them for an honest choice of benchmark) Given that they charge 20% performance fees with a 5% hurdle rate, there appears to be some raw skill (though over a fairly short period of 7 years). Of course, clients will see none of that alpha, after fees and tax, especially considering that they receive taxable capital gain distributions. So my quest for a hedge fund that truly adds value will be ongoing. In any event, nothing conclusive can be said until a fund reaches the 15 year mark, which ought to include at least one real bear market.

I became aware of Montreal-based Barrage Capital a few years ago. They were doing online marketing and I had a favourable initial impression. They were self-described value investors, talked a lot about Buffett. Their fund structuring was high end. They had fancy service providers. They had a snazzy website. Business-wise, I thought it was a strong startup fund. Many great investment minds cannot put together even a half-decent fund factsheet. It's almost like those two skills are incompatible.

But this group really presents well. In fact, take a look at the team and tell me you have ever seen a better-looking group of people, whether in finance or boy bands.

https://barragecapital.com/en/team/

That's the other unusual aspect of Barrage, there are four co-portfolio managers operating by consensus. Two of them come out of a boutique manager and two of them were investors in their own right, possibly in real estate, I forget. The fund was started in 2013. Around 2014, I saw they had $12m AUM. And now, they're around $100m...but their AUM growth has stagnated in recent years. (Their big alpha year was 2016, they have not added meaningful value since then).

Here’s my biggest bugaboo and perhaps the reason why their growth has stagnated. Many people don't know this, but "barrage" is a French word that means "unwarranted performance fee". Performance fees are a bad deal and Barrage Capital doesn't convince me otherwise. I wouldn't really care all that much if a manager trails the benchmark by 50 bps a year during a strong bull market, if that's because the fund is made up of slowpoke, steady-eddy companies. But in this case, Barrage has outperformed by a big margin BEFORE FEES, by investing in some of the hottest names of this bull market. Whether through luck or skill, they really caught the zeitgeist of the market for the past few years. Currently, the fund looks like a one direction bet on Big Tech, with the top 5 positions being Alphabet, Facebook, Apple, Amazon, and Tencent. They have a highly concentrated long-only fund with 11 positions. I have seen this number fluctuate between 9 and 15. At one point, Alphabet was 20% of the portfolio. In 2020, such moves might seem in vogue. But I know Barrage was somewhat early in understanding the tech trend. For example, they started buying Apple in 2014.

Yet for all this "insight" or presumably intelligent risk-taking, all the client sees is a tiny edge AFTER FEES - an edge that gets obliterated when tax is considered. And at some point, investors will have to pay the piper - in the form of a bear market. Do you think that the leaders of the bull market will also fare best during a bear market? I don't think that’s the usual pattern.

The fund has not always been an all-in bet on Big Tech. Some years ago, they put 20% of their fund in Best Buy. They have bought things like General Motors, AIG, Citigroup and Bank of America. They deal in well known American names. This means that they have capacity measured in billions. For all their marketing savvy, I still think they made one big mistake. Their performance fee detracts from the most powerful marketing force there is: beating the market by a meaningful margin. By failing to meaningfully beat the S&P 500, their business is vulnerable to some snarky blogger pointing that out. I would never do that myself, because I find such behaviour to be without class. But it’s a risk. No snazzy website can overcome this essential fact - not in the mind of a right-thinking client, anyways. Funds, when they work well, can be exponential businesses. Performance fees are an inhibitor of that growth. I know they're fans of Jeff Bezos, but they're not applying his long-term thinking to their fund. Bezos wouldn't charge performance fees until year 50, when he's at $10 trillion AUM - when it can really pay! I also wouldn’t invest for reasons you might have picked on your own - like 20% weights.

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