U.S. Markets closed

Hedge Fund Manager Looks for Small-Cap Consumer Growth Stocks that Won't Get "Amazoned": A Wall Street Transcript Interview with Lori Wachs, the Co-Founder and Investment Manager of Cross Ledge Investments

67 WALL STREET, New York - May 28, 2014 - The Wall Street Transcript has just published its Investing Strategies Report. This special feature contains expert industry commentary through in-depth interviews with highly experienced, professional Money Managers. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

Topics covered: Secular Growth Themes - Small Cap Investing - All-Cap Investing - Bottom-Up Stock Selection - Quality of Business - Growth at a Reasonable Price - Long/Short Strategy - Investment Risk/Return

Companies include: Amazon.com Inc. (AMZN), Lumber Liquidators, Inc. (LL), Under Armour, Inc. (UA) and many others.

In the following excerpt from the Investing Strategies Report, an experienced Hedge Fund portfolio manager discusses her investing methodology and top stock picks for investors:

TWST: Hedge funds have been described by some as mutual funds on steroids. What's your definition of a hedge fund?

Ms. Wachs: Well, there are many different kinds of hedge funds. The type of hedge fund that we run is a long/short equity fund. And I actually do not believe that it resembles a hedge fund on steroids, because we are in effect dampening the volatility while still providing quite a bit of exposure to the upside. We short stocks against our long book, and we tend to run at about a 50% net long exposure.

Over time, we believe stock markets go up, and we want to be positively positioned as it relates to that. But in order to smooth out some of the market bumps and downturns along the way, we like to short what we view as the underperforming stocks against the stocks that we've picked that we believe will outperform over time.

TWST: How much do your strategies, focus, and techniques for managing risk vary according to market conditions? How fluid are they?

Ms. Wachs: Again, this is specific to Cross Ledge. We have set up a band of net long exposure of 40% to 60%, and we feel that that has served us quite well; it gives us some room to move based on the type of market that we're in. However, whereas we pride ourselves on being strong stock pickers, we don't really say that we're going to be outstanding market timers. So we didn't want to give the band too much leeway.

In a very strong market like we saw last year, we saw a lot of hedge funds widen their net exposure to greater than 60%, and then you run into some road bumps earlier in the year, and it's been difficult to kind of rein that exposure back in. So again, that's why we've really stuck to our knitting with this 40% to 60% band.

The same holds for the reverse kind of scenario. We came out of a market a few summers ago where a lot of hedge funds had gotten very bearish with their positioning, and we were still sitting at the lower end of our band but still within that 40% to 60% range, and the market really took off and we were already there, positioned to capture that.

TWST: Please share some of your own career highlights. What motivated you to become a hedge fund manager?

Ms. Wachs: My career path, it's pretty short and sweet. I graduated from Wharton, undergraduate in 1990, and I immediately went to work at Goldman Sachs in New York in their Equity Risk Arbitrage department, and it was part of a two-year training program. And when those two years were up, personal reasons brought me back to Philadelphia and I immediately went to work for Delaware Investments in the Emerging Growth Group, which had several different products, but always focused on quality growth stocks in a classic sense, in both the small and midcap world.

I started there in 1992 as a Junior Analyst and worked my way up to a full-fledged Analyst and ultimately a Portfolio Manager, and I spent 17 years of my career there...

For more of this interview and many others visit the Wall Street Transcript - a unique service for investors and industry researchers - providing fresh commentary and insight through verbatim interviews with CEOs, portfolio managers and research analysts. This special issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.