Caution is the watchword for veteran hedge-fund manager Veronika Hirsch. “Right now we are sitting at 35% cash,” says the manager of the $142-million BluMont Hirsch Performance. “And I think that tells you how cautious we are. I’m using it strategically, as opposed to not having any ideas today.”

Hirsch is the chief investment officer of BluMont Capital Corp., a wholly owned subsidiary of Toronto-based Integrated Asset Management Corp., which manages about $3 billion in alternative strategies mandates.

Along with BluMont Hirsch Performance, which she has managed since its launch in September 1997, Hirsch is the lead manager of five other funds, including Blu- Mont Hirsch Long/Short and the resource mandate. She is responsible for $220 million in total assets under management.

Available only to accredited investors, or others willing to ante up at least $150,000, BluMont Hirsch Performance operates on a shorter leash than many of its hedge-fund peers. At most, it can short 10% of the portfolio. But it can employ leverage.

A growth-investing discipline, with an element of growth at a reasonable price (GARP), drives Hirsch’s strategy. She seeks companies that can deliver positive earnings surprises, but she also puts a premium on earnings stability. “I’m happy with companies that grow at 2 or 3 or 5%, as long as it’s consistent,” she says.

Of the five hedge funds currently tracked by Morningstar Canada with 10-year track records, Blu- Mont Hirsch Performance ranks a solid second, with a compound annual return of 14.7% to July 31.

Its 12-month returns have ranged from 98.1% in the period ended February 2000 during the late stage of the growth-stock boom, to a loss of 8.8% in the 12 months ended March 2003. Its worst three-month loss, back in 1998, was 20.1%.

The resources sectors currently constitute more than half of the fund’s current 60 holdings. To limit company-specific risk in any industry, the maximum weighting per security is usually kept to about 5 to 6% of the overall portfolio.

Bearish on banks, Hirsch hasn’t held significant positions in them for about a year. She doesn’t expect the financial sector to grow in the next year. While valuations in the sector have come down, “I’m not a value investor, so cheap doesn’t do anything for me,” she says.

The portfolio is grounded in predominantly mid- and largecapitalization Canadian companies, with typically about 5% foreign content. Hirsch considers some of the large caps to be over-analyzed and the small caps too illiquid. She prefers to invest in the middle of the market-cap range, where you can add value by doing extra research.

Hirsch is leery of model-based strategies. She prefers to concentrate on a company’s valuations, its long-term strategy and management’s ability to deliver growth. To assess this, she monitors the company every quarter. If a company hasn’t delivered for three quarters, the stock may be sold. “That’s basically how I roll over my portfolio,” she says.

Hirsch likes being the fund’s sole manager. “You’re fully responsible, you’re much quicker, you don’t have to have a meeting,” she notes. That said, she uses colleague Shawn Boire as a sounding board, tapping into his expertise in the energy sector.

She joined AGF Management Ltd. in 1995 and then jumped to Fidelity Investments Canada the following year. In the wake of a controversy over personal trades while employed by AGF, which were found to be in breach of securities regulations but did not affect fund investors, Hirsch left Fidelity in early 1997. Later that year, she established Hirsch Asset Management and launched a family of funds.

Looking back on her industry experience, Hirsch says she has never seen a momentum-driven market quite like this one, in which hedge-fund movements distort the fundamentals in the short run. She says we are entering a stage where the balance sheet becomes far more crucial than during the last five years, especially with the impact of the credit crisis.

“We think that we’re not through the worst in terms of the financial sector, there’s more bad news to come,” says Hirsch.

Diana Cawfield is a Toronto financial writer.