Industry Insights: Copper Street Capital - Alternative Investment

The 4^th Industry Insights event, organised by the ICMA Centre in partnership with the University of Reading Finance Society, saw Copper Street Capital, a hedge fund based in Maidenhead, come to the ICMA Centre to deliver a presentation on alternative investments and the current strengths and weaknesses of the financial industry.

Mr. Bruno Duarte, Alumni of the ICMA where he undertook a master’s degree in International Securities, Investment and Banking, led the talk and took us through his career and where he sees the future of investing.

Copper Street Capital is unique in the sense that they are an event-driven hedge fund, solely invested in financial services firms. They focus primarily on thoroughly analysing the entire capital structure of companies they are thinking to buying into, as they think that a for a position in a bank or another financial services provider to be sustainable in the long run, not only analysing just the equity of the company but the whole balance sheet and situation is crucial.

Mr. Duarte emphasized the importance of staying up to date with what is happening in finance, not only because key news come out every day but also because we are living in an age where the intermediary nature of banks and other financial services provider is changing radically. The transformation of financial services will bring the competitiveness of the industry to the next level and it is important to catch the train before it is too late.

At the forefront of this transformation of financial services, explains Mr. Duarte, is regulation. Regulatory measures have never been so present on the financial scene, with Basel IV in the pipeline for 2019, adding rules on risk models and capital floors. Regulators have enacted massively since the subprime crisis with capital requirement being number one on their priority list. The share count peak in 2008 across leading banks shows how quickly regulators jumped in to fix capital issues, with rights issues being the tool regulators asked banks to use to re-capitalise effectively. Banks are now slowly buying shares back, which makes the market think that US banks have reached a certain stability.

Even though the US market is going growing well, Mr. Duarte explained that Copper Street Capital finds the European market much more interesting, with the plethora of different countries and their respective market rules giving Copper Street Capital more freedom in choosing investments by seeing how each country welcomes new regulation.

This situation differs with the US, with the same regulations in all states making it trickier for an event-driven hedge fund to find arbitrage opportunities. Their main focus across Europe at the moment goes from Germany restructuring their banking industry, to examining opportunities in Portugal which just massively cleaned their banking industry, to focusing on the impact Brexit will have on companies operating in the UK.

Concerning the UK, Mr. Duarte explained that due to the uncertain nature of Brexit Copper Street Capital have reduced positions they had in the country. Lloyds banking group for example, are down 20% because of this same uncertainty, while having done everything right to help all stakeholders, which should have boosted their share price.

To conclude the talk, Mr. Duarte recapped the strategy Copper Street Capital undertakes to choose investments, explaining once again the importance of healthy capital and their preference for banks with high profitability, low pay-outs and cheap relative valuations.

During the Q&A session, Mr. Duarte discussed the importance of putting emotions aside during the due-diligence process and how he thinks that Artificial intelligence will help executing trades while humans will always be more effective at sensing the big picture of the potential profitability of an investment.

The ICMA Centre and the UoR Finance Society thank Mr. Duarte and Copper Street Capital for a really insightful talk!

Emmanuel De Labauve DArifat