Dalton Street Capital, a partnership between the Investment Team and Prodigy Investment Partners, is a boutique absolute return investment manager that invests based on mathematically established principles of behavioural finance and rigorous logic. This approach provides investors with strong absolute returns and low correlation to traditional asset classes. The Dalton Street strategy was formulated in 1996 and has delivered positive absolute returns in every calendar year since inception.
"For us investing is a complex scientific problem": Q&A with Dalton Street Capital's CIO and co-founder Alan Sheen June 2018
Dalton Street Capital co-founder and CIO Alan Sheen has been investing using a unique quantitative strategy for over two decades. A scientist at heart, Sheen likes using the same evidence-based approach to investing. We spoke to Alan about how both unconscious and conscious biases can lead to investing "mistakes" and why investors need to consider an absolute return strategy.
- You describe your fund as an “absolute return investment manager that invests based on mathematically established principles of behavioural finance and rigorous logic” can you detail this process a little more?
By empirically analysing statistically significant data sets, we are able to identify and capture alpha originating from the interrelationships between global markets. We rigorously apply this logic and technique in a disciplined approach to trading, portfolio risk, composition and management.
- What do you believe are the benefits of your approach over more fundamental investing styles?
By removing the human element we’re able to eliminate a number of natural biases that plague humans in their assessment of risk and the relationship to returns. The propensity for narratives, relatability, anchoring and false pattern recognition are just a few of these behaviours we’ve managed to avoid by using a scientific approach to investments. Plus, our style offers a natural diversification benefit for the end investor (by default rather than design) as most of the other fund managers used in investor portfolio’s are fundamental in nature.
- How long have you been trading this strategy?
- How long did it take to develop this strategy?
Initially it took three months of research and then six years enhancing to land at the strategy we run today.
- Do you believe that unconscious biases are behind many of our investment mistakes?
Absolutely, both unconscious and conscious biases contribute to investment “mistakes”. As human beings we’ve evolved to assess physical risk exceptionally successfully. Unfortunately these heuristics and biases don’t transfer over to the complex structures and risks that make up financial markets.
- What place does an absolute return fund have in an investor’s portfolio?
One of the drawbacks of the traditional asset allocation models has been a lack of exposure to absolute return funds. Going forward, as more and more Australian investors move closer to their retirement age, they ought to pay more attention to absolute return funds that can provide uncorrelated returns to the traditional assets.
Obviously, it also depends on the goals and risk appetites of the underlying investors. If investors are comfortable with risk/volatility, and are committed and disciplined enough to take a long term approach, they should see significant outperformance by allocating the majority of their portfolio to uncorrelated absolute return strategies.
This is one of the reasons why goal-based models and other similar models are gaining traction in the Australian market.
- Who do you see as your main competitors?
There are virtually no local funds offering global quantitative macro strategies spanning all major asset classes and markets. We believe Dalton Street Capital offers an excellent opportunity for local investors to gain this exposure. Globally we compete with large scale scientific houses like Rennaissance Technology, Winton Capital, Aspect Capital and MAN AHL Funds.
- No member of the investment team started out in investment management, do you think that has given you an advantage over the longer term?
Our entire investment team has a background and formal education in hard science and engineering. This ensures we are all well trained and versed in the disciplined approach necessary to study and implement strategies based on the complex interrelated data sets found in financial markets. Science and engineering are professions forged on the application of knowledge based on rigorous testing and verification. Unlike the world of finance and economics, our formulas and assumptions are not predicated on “confidence levels” or “rational beings” but rather observed patterns of behaviour and their results.
- What do you love about managing money?
Clients are entrusting us to deliver outcomes that will ensure they achieve their goals in life. What greater responsibility or honour could one bestow on a person? It’s always fun hypothesising and either proving or disproving ideas with data. For us investing is a complex scientific problem, that may never be solved, but there are still a vast number of solutions that can result in positive gains. We are engineers at heart, and we take great pride in knowing we can engineer portfolios that deliver for clients, whether it be protecting or growing their capital, or even better, achieving both!