We utilize a quantitative approach for our top-level allocations and combine with a discretionary approach for our individual equity positions. Our goal is to deliver stable growth through all economic environments.
Our quantitative research efforts are focused at the top end of the allocation pyramid where allocation decisions are most consequential to your returns. We have modeled a unique framework which allows us to observe how economic, valuation and behavioral factors have historically impacted future equity market returns over the past 50 years, and we apply this insight using a rules-based process to determine our market and style exposures. (Institutional investors are welcome to contact us regarding access to this research).
Our discretionary research is focused at the individual stock level. This generally entails screening stocks on a combination of fundamental and technical factors and then performing rigorous fundamental research and analysis on ideas we choose to evaluate further. Through our continued research, we have built up a storehouse of investment candidates - both long and short - that we can act upon when the market delivers to us, a price which provides an asymmetric reward-risk payoff. We take long positions in stocks that we determine are fundamentally cheap and wish to own for the long-term, and short positions in stocks that we determine are fundamentally expensive.
In sum, our quantitative models guide our overall market and style exposure, and our discretionary research identifies individual stocks that are then tilted in line with our overall market outlook.
The investment process is a two-pronged:
Step #1 - Determine our desired level of market exposure
Our market exposure can range from -50% short up to 150% long. Historically, over 50 years, the model would have been leveraged long approximately 40% of the time and net short approximately 12% of the time.
Step #2 - Stock selection
We have two baskets; one is a basket of long ideas which we expect will outperform the market, and the other is a basket of short ideas which we expect will underperform the market. The weights of each basket are adjusted to reflect our desired level of market exposure from Step #1.
Proprietary quantitative market exposure model: Market exposure is adjusted based upon a rules-based process validated over fifty years covering multiple economic cycles. It is expected to deliver attractive, uncorrelated returns, particularly during down markets, when diversification most needed.
Reasonably concentrated portfolio: Having 10 to 15 positions in each of our long and short baskets allows detailed due diligence, and research effort required to properly assess and monitor each stock.
Risk management: The maximum individual position size in the long portfolio is 15% and in the short portfolio is 10%.
Simple fee structure: 12% of profits with a high-water-mark test. No asset management fee.
How we differ from traditional hedge fund strategies: Most hedge funds are slightly long-biased or market neutral reflecting their agnostic nature toward the direction of the market - hedge funds are by definition supposed to outperform the market regardless of market direction. Our approach specifically starts with making a call on market direction, and thereafter adds a stock selection component on top of that.