Not even the best lawyer can win every time, but they can minimize the scale of their losses. They find technicalities, enter pleas and negotiate reduced sentences – anything to get the best possible result from a bad situation.
It’s an approach that former law men Marty Kerns II and Parker Binion have taken from their previous profession into their current one, as chief executive and chief investment officer respectively at Houston-based Kerns Capital Management.
Kerns benefited almost instantly from his desire to limit losses. Having joined his father’s firm in 2007, he launched a quantitative equity long-short strategy, KCM Macro Trends, in August 2008. Talk about bad timing.
‘Right away, we had Lehman Brothers [collapse], so we were thinking “Wow this is a great time to start a fund,”’ he said.
But his instincts soon kicked in. ‘We minimized our losses such that we were only down 14% and we were back to breakeven by May 2009. The S&P 500, which was down around 44%, didn’t recover for an additional 20 months after that.’
Today, the fund is the firm’s flagship strategy and has $90 million in assets under management. It is ranked second out of 52 funds tracked by Citywire in the Global Macro liquid alternative category, returning 56.7% against the peer average of 15.4% over five years to the end of August.
It’s safe to say Kerns turned an early defeat into something resembling a win, and the pragmatic mantra of damage limitation remains with him.
‘We try to define the amount of risk we take, and when risk gets very high we’re going to hedge and when it gets low we’re going to go longer. So we’re not always long-short and I think that works well,’ he said.
‘Most long-short managers haven’t done that well and that’s because they’ve had to stay short through this crazy bull market.’
The firm now has a total of $190 million in assets under management. Aside from its flagship fund, it also offers four asset allocation strategies, which are available as separately managed accounts, a range of risk-based model portfolios and a hedge fund.
Still, there have been tough times along the way. Two years after buying the firm from him, Kerns was hit by the death of his father.
It was around that time that Binion arrived on the scene. Kerns and Binion had been childhood friends and went on to share a fraternity, albeit at different colleges, and a profession as tort lawyers.
Their paths crossed again when Kerns asked Binion to join the family business in a researchfocused role and to help hone the firm’s quantitative capabilities.
The two now run the KCM Macro Trends together. Binion believes his legal background is both a blessing and a curse.
‘On the upside, law school teaches you to think critically and not take anything at face value. This has been helpful in evaluating the criteria we use in our models,’ he said. ‘On the downside, law school teaches you to argue both sides of any issue. Paralysis by analysis. It’s one of the reasons I turned to quantitative models.’
The fund follows a rules-based quantitative process for asset allocation and for deciding when to sell, hedge or buy back into positions.
‘Coming off of the bottom is usually a rocket shot and if you’re not back in a timely manner, you can miss a lot of upside potential,’ Binion said.
The fund combines six different strategies: blue chip domestic stocks, dollar-denominated international equities, large-cap value, large- and mid-cap momentum, small-cap growth and a sector rotation approach using exchange-traded funds.
The managers can allocate a maximum of 25% of the fund to a given strategy. ‘When you’ve got six strategies and two of them are kicking butt and the other four are holding their own, then your fund is going to do well,’ Binion said.
‘We’re winning the peace and we’re preparing for the next war, which will be a topping process and an eventual correction but that’s not anything we see within the next few months.’