How Inflection Management picks fund managers, not stocks

Ari Shiff focuses on broad macro trends and leaves the specifics up to specialized fund managers

Inflection Management CEO Ari Shiff

Inflection Management president Ari Shiff. (Portrait by Trevor Brady)

In the 1990s, Ari Shiff was just another do-it-yourself investor trading stocks over the phone. Back then, the investment company researcher had a high tolerance for risk and made some fast money. But a devastating accident in 1995 nearly ruined him. He was hit by a FedEx truck and was out of commission for weeks. “It was ironic,” Shiff says now. “I had made lot of money in FedEx.”

When he was ready to start investing again, the Vancouverite’s risk tolerance had changed. He had been self-reliant and fearless, he says, but after coming face to face with his own mortality, he realized he needed to do a better job of protecting his money and his family.

So he changed his investing approach. Rather than trade himself, Shiff handed over parts of his sizable portfolio to different Canadian and U.S. fund managers. He also began investing in hedge funds. This strategy worked so well for him—he claims a 12% annualized return between 1997 and 2001, despite the dot-com bust—that he decided others could benefit from his approach.

Shiff, 52, is now the president of Inflection Management Inc., a company that invests with several hedge fund managers. His Inflection Strategic Opportunity Fund (ISOF), a fund of funds, doesn’t purchase stocks or bonds. Instead, it buys managers who do the investing for him.

This might run against the trend toward disintermediation in investing, with passive strategies and low fees. But Shiff insists it works because there are people who know specific markets better than he does. His job is to look at economic trends, set the macro strategy and then find managers who have the expertise to take advantage of his big-picture ideas. He also wants to mitigate risk, which is why he only uses funds that employ hedging strategies. “What I love about hedge funds is that you can make money on both the upside and the downside,” he says.

While not all bets have paid off—his global macro strategy suffered amid currency volatility in 2014—Shiff says he ends up losing less in down markets than pure equity managers do. And when things do go right, there’s solid upside too. He had been anticipating a drop in oil prices, for example, but rather than play oil producers (which Canadian investors already hold a lot of), he decided to focus on the energy transportation sector.

Shiff found a hedge fund company that had been following the sector for decades and saw a lot of opportunity. The firm employed a long-short strategy—it went long on the stocks that took a big hit from falling oil prices and shorted those that didn’t. It’s worked so far. In November, when oil prices fell from US$78 a barrel to US$65, ISOF made 2.49% versus a 1% return for the S&P/TSX composite.

Pie chart showing Ari Shiff’s  investment breakdown by sector

His next big call is on Greece. People are too bearish on the country’s bonds, he says. He thinks Europe has plenty of distressed assets, including banks, that will eventually outperform. If you want to buy into his ideas, though, you’ll need at least US$100,000 and be able to stomach the 1.5% management fee and 15% performance fee.

Shiff’s wealthy clients still sign up because they’ve seen a 10.2% annualized return since 2010 after fees, compared to the S&P/TSX’s 7.9% five-year annualized total return. Whatever people think about hedge funds, Shiff says these are strategies used to protect wealth. “We call them ‘alternatives,’” he says. “They offer efficient diversification and lower correlation to the market. But they also give you higher returns.”