Trading and Investment Strategy
Our philosophy of investing and trading rests on a number of core principles. First, we believe that market inefficiencies and the corresponding opportunities to find return premiums are inversely proportional to the size of the market segment and its liquidity - i.e. “niche” markets are systematically more attractive. A niche is defined by its illiquidity, and illiquidity is a function of many factors including market size, time, and information. For example, a small or esoteric market such as electricity is clearly a niche, but a large market such as off-the-run corporate bonds can also show pronounced illiquidity. Moreover, even very large markets, such as ETFs, can show significant illiquidity during times of stress and panic selling. Information lags also create illiquidity. These lags can result from the scarcity of in-depth and leveraged information, thus slowing down the price discovery process – in effect, creating illiquidity.
Developing an edge in a niche is labor and data intensive, which also creates barriers to entry. While we find niche markets systematically more attractive, they can be volatile, i.e. opportunities come and go over time. Consequently, we address multiple niche markets to form a portfolio designed for sustainable and diversified performance. In contrast, we believe that an overly specialized hedge fund cannot help but provide a biased perspective of the opportunity space to the investor, and is hard to sustain.
The most attractive investments will not always yield a market neutral portfolio. While risks should be balanced, market neutrality (zero beta) can in itself often be a costly hedge. So we do not have this as an overriding objective.
We recognize that any fund with a focus on generating value from inefficient niche markets has a natural limit in size. As a result, we are designed to be able to profitably operate in markets that may be too small for the larger funds.