Charles Frumberg introduced us to his hedge fund, Emancipation Capital as a value oriented technology focused fund. He defined a hedge fund as a private partnership that invests money using a variety of strategies for high net worth individuals and organizations. Their strategies are all directed towards obtaining high returns on the investments they select. They obtain their compensation in two ways – by a fee and also charging a percentage of the profits they achieve.
Mr. Frumberg stated that an important index for hedge funds is the Vix, which basically measures the amount of fear in the marketplace. Generally this results in tremendous volatility especially as of late. What we have now are investors fleeing to quality investments that are perceived as lower risk. Feeding into this trend are low interest rates that have destroyed the investor class that depends on interest as their primary source of income and a staggeringly high junk bond default rate, which normally are investments that present an alternative to equities.
Emancipation Capital chose the value technology sector as its focus because technology has been the greatest creator of wealth in the history of the world. Software dominates this sector and Emancipation looks for companies that have a high level of merger and acquisition activity as well as a concentrated group of shareholders. These factors can indicate a value opportunity especially if they are found in a publicly held company, which almost never go bankrupt.
The latest and some of the most successful technology companies are those using a Website approach such as Uber or Airbnb where they decimate old style businesses such as the taxicab industry in the case of Uber and moderate hotels for Airbnb, but are based almost entirely on Websites with no other assets.
Q. What is “carried interest”?
A. It is the percentage fee charged on profits that is taxed as a long-term capital gains investment. It is now a political football and will not exist much longer.
Q. What are the barriers to entrance for a Website based company?
A. Mostly inertia. A company that gets out first and builds a brand is liable to survive, but there aren’t many barriers to new competition.
Q. What effect is fear having on European markets?
A. I hate European markets. Tourism will get killed because of terrorism, but their markets will hold up until business gets adversely affected.
Q. Where is the mobile computing market going and where will the growth occur?
A. Mobile computing is here to stay. Growth is in the smart assistant to your phones. This will replace many apps. Just ask the smart assistant to do it and it’s done. The very large companies such as Microsoft, Google and Amazon will get the benefits
Q. How would you address income inequality?
A. I’m neutral. You can’t defend it. There is no reason not to tax the more affluent at higher rates, but these are policy questions.
Q. How do you avoid the value trap in technology investing?
A. Technology value is oxymoronic to a lot of people, but my company does not set out to participate in momentum investing. Even in some technology companies you can find situations where there is good cash flow and cheaper stock prices.
Q. Any thoughts on the Federal Reserve and its impact on your business?
A. When left alone price finds its own level. The Fed. interferes with that and in so doing creates disruption and eventually greater pain.
Q. How well do you do compared to the market?
A. We do very well in down markets and less well in ascending markets. Overall we outperform the market.
Q. What are your thoughts regarding the bio-medical sector?
A. That is the invention business. Most fail and some are spectacularly successful. It combines technology with regulation and is not my area of expertise, but it’s interesting.