Emanuel Weintraub: Risk and Reward on the Long Side

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Emanuel Weintraub, a former co-portfolio manager of a $1.5 billion fund at Neuberger Berman, decided three years ago to launch his own long-only hedge fund, New York-based Integre Advisors.

The move raised eyebrows in hedge fund circles, where some consider it heretic to manage money without shorting stocks. Many in the industry view long-only managers as mutual fund pros trying to reinvent themselves as hedgies just to cash in. But Weintraub can justify his 1% management and 20% performance fees.

He has outperformed the S&P 500 Index by 8.7% over the past five years, and by 10.7% over the past 12 months. In addition, his performance fee applies only to the profits he makes over the benchmark. He agreed to talk to TheStreet.com about his investment philosophy.

What's your approach to stock-picking?

Weintraub: We invest in out-of-favor growth stocks using a risk/reward strategy, and our selection process is a mix of quantitative screens and qualitative judgments. When a company that had until recently been growing quite nicely falls out of favor with the investment community (usually due to an earnings disappointment or lowered guidance, but it could be a controversial acquisition or a government investigation), we create two distinct earnings models: an optimistic model and a pessimistic model. From those models we calculate optimistic and pessimistic stock price targets. We will only invest if we can earn a double-digit return to the midpoint of these two targets. Therefore, there is no hedging but a series of investments with better upside than downside and a disciplined process that manages the risk.

Are you a value investor?

EW: I used to be a straight deep-value person looking only for the lowest price/earnings ratios I could find. However, seeing the punishment that those types of stocks took in the Asian crisis, I shifted my focus to more stable businesses that have high returns and generate free cash flow. These businesses have some sort of unique franchise that allow them to generate these high returns and usually higher valuations. Within the universe of high-return businesses, we look for those companies that we think can grow their revenue organically high single digits or better over time (good long-term prospects) and have been unduly "punished" by the Street for reasons that we believe are transient.