Engineering Absolute Returns On Dalton Street
If you met Dalton Street Capital's Alan Sheen, you'd swear he was a professional rugby player. In fact his background - and that of his Co-founder Nick Selvaratnam - is in engineering. The two first worked together at Credit Suisse, where Sheen was Head of Trading and Selvaratnam Head of Equities, before deciding in 2016 to walk away from lucrative careers and establish Dalton Street Capital.
One of the primary challenges for any new fund in establishing itself is ensuring that advisers and investors understand the Fund's investment process. This is particularly so when that process sits outside more traditional investment models.
In the case of Dalton Street, whose Absolute Return Fund utilises a quant-based multi-strategy trading methodology, this means convincing investors that mathematics, science and rigorous logic can engineer a positive return regardless of market direction. Which is precisely what Sheen's systematic approach to investing has been doing inside investment banks and family offices for 22 years without a single negative annual return.
This investment approach combines a long-term equity portfolio with a short-term managed futures strategy.
The equity portfolio is composed and maintained using an algorithmic model that analyses evidence-based data and fundamentals that are known performers over time, such as P/E ratio, dividend yield and earnings yield. It has a very low turnover, with average holding periods of five years or thereabouts.
The managed futures strategy works differently. Research by Dalton Street has shown that those same long-term fundamental model inputs don't work over the very short term, where drivers are more likely to be liquidity and volatility. Based on these findings, Dalton Street uses computer models created by Sheen himself to generate buy and sell signals that enable them to actively trade on a daily basis, with the broad aim of offsetting potential losses on the equity side.
Investors looking to take advantage of volatile trading conditions should pay special attention to the Fund's performance during times of excessive volatility, when the strategy has historically performed best.
Consider a heavily downtrending market, for example. While losses on the equity portfolio are to be expected, these can be offset by the managed futures strategy, which is able to take advantage of the large intraday movements associated with the volatile market conditions.
That is the beauty of the multi-strategy approach undertaken by Dalton Street in their Absolute Return Fund: it not being reliant on market direction for performance.
This institutional-style investment product is now available to retail investors for the first time, via your broker on the ASX's mFund platform.
And just in case you were wondering where Dalton Street is? It's in Nyngan, Sheen's hometown. It intersects Bogan Street and is located within the Bogan Shire. Which made choosing a name for the Fund pretty straightforward. As Sheen says, 'I couldn't possibly have called the business Bogan Street Capital, could I?'
For product information on the Dalton Street Absolute Return fund please click here: http://www.informedinvestor.com.au/product/ETL0469AU-100134?v=0.10152950157570717
Tim McGowen is the co-founder of informedinvestor.com.au. He was previously the founder of Fortitude Capital the Hedge fund of the Year in 2008 & 2009. More recently he was a global Portfolio Manager for PM Capital.