Dalton Street Capital is a boutique alternative asset manager based in Sydney. The founder, Alan Sheen, has experience in hedge fund and equity trading and previously worked at Credit Suisse. The firm commenced trading in mid-2016 using a strategy that Alan Sheen had used successfully at Credit Suisse with the Bank’s own assets and for a High Net Worth Family in the United States prior to that.

The stated objective of the Dalton Street Absolute Return fund is to provide absolute returns in a variety of market conditions with a low correlation to traditional assets. With traditional asset classes looking quite expensive and potentially near the end of a long expansion alternative sources of return are at a premium. There are numerous black box strategies that purport to perform in a similar way but the Dalton strategy stands out in the flexibility and transparency afforded to InvestSense. We think this is important for two reasons. Firstly, while managed futures offer a valid ‘alternative risk premia’ they tend to be somewhat unpredictable and drawdowns can happen at any time. Access to senior portfolio managers on a routine basis helps us overcome these concerns. Secondly, many of the larger firms operating in this area seem to be in a competitive arms race for alpha but are otherwise pursuing ostensibly similar strategies. This dynamic lends itself to severe underperformance in times of crisis.

There are 2 principle components to the strategy - a long only Asian equity strategy and a managed futures overlay. The equity strategy is contrarian and value based and seeks to exploit statistically proven behavioural weaknesses in investor behaviour. Hence it should deliver a return equivalent to risk premia in line with or better than Asian equity markets. While the managed futures component should perform well in volatile and/or strongly trending markets.

So far the managed volatility strategy has been able to more than offset any weakness in the equity portfolio in times of stress but there is no guarantee that this will always be the case, especially in ‘gapping’ markets (where the market falls precipitously in a very short period and it is impossible to de-risk the portfolio or implement defensive hedging strategies.