Last year was a good one for London-based Dalton Strategic Partnership. While most managers struggled to raise capital, the firm was able to hard-close both the Melchior European Fund (MEF), an offshore Cayman fund, and the Melchior Selected Trust: European Absolute Return fund, a Ucits-compliant vehicle, which are managed using the same investment strategy.
Says managing partner and chief executive Magnus Spence (pictured): “The whole strategy has now hard-closed. We raised a lot of money in the first half of the year as people saw that we could protect capital in difficult years like 2008.” The Cayman fund closed at USD100m last October, while its Ucits counterpart closed in July when assets reached USD600m.
Leonard Charlton, a partner in the firm, is portfolio manager to both funds. Last year, despite challenging markets, the Melchior European Fund was able to return 13.45 per cent, compared with a decline of 3.15 per cent for the EuroHedge European Long Short Index. “Hedge funds that are correlated with equity markets, in my mind, don’t bring investors as much benefit as a fund that is truly uncorrelated,” Spence says.
What sets the fund apart from its peers is its ability to combine fundamental analysis with an active trading overlay at both macro and micro levels. Says Charlton: “Being factual and rational helped us keep out of trouble during last year’s turbulence. We view macro volatility as both a threat and an opportunity. Because the portfolio is flexible and we assess things on a daily basis, we’re quite comfortable with changes in the macro environment.”
The fund employs a pan-European strategy across all-cap stocks. Charlton places as much importance on generating alpha from active short selling as he does on taking long positions. Aside from the macro overlay, this is one of the key reasons why MEF outperformed its peers. “The short portfolio, which made 27.99 per cent gross in 2011, contributed more than the long portfolio last year,” he says.
Spence believes there are three keys to the team’s success. “First, we are prepared to trade on macro news and views as opposed to purely fundamentals,” he says. “Secondly, we trade actively to manage risk. Thirdly, our fundamental stock selection process means we spend as much time trying to find good short ideas as good long ideas.”
At the end of December the MEF had a net short exposure of 16.7 per cent and a gross exposure of 142 per cent. Within the net exposure, the UK was the most favoured country, while Sweden and Spain were among the least favoured. The fund’s biggest gross exposure at the end of 2011 was to consumer discretionary and industrials.
“Last year we kept gross exposure low, we traded the net exposure and we made alpha both on the long and short portfolios,” Spence says. “We did exactly as we said we’d do.”
Charlton views the fact that NYSE short interest is at its lowest level in 12 months as a positive catalyst: “If anything we’re even more interested in shorting because it means a lot of investors have sold their shorts during the recent US equity market rally. Low short interest to us is a warning sign that there’s complacency in the market. As short sellers we’re encouraged there’s low interest right now.”
Spence adds: “We’re delighted to win Hedgeweek’s Best Long/Short Equity Fund Manager award for the second year running. Consistency is what investors want from a hedge fund.”