The competitive advantages of the Equus Point Capital Market Neutral Fund include:
Typically market neutral strategies tend to be pairs trading in nature, offsetting long positions against related short positions, on either a dollar weighted basis of the beta weighted basis. The ability to short also provides the ability to leverage the portfolio, using the proceeds from the short portfolio to fund the long portfolio.
We are different in that the typical Equus Point Capital portfolio is more akin to a long/short (e.g. 130/30) strategy with a futures overlay to achieve a desired overall portfolio beta position.
We are not a pairs trading strategy
A pairs trading model is where a long position is offset against a related short position, determined either on fundamental grounds or on statistical measures. For example, a manager may have a positive view on BHP and take a long position, offset by a negative short position in RIO.
Note, pair trading consists of two legs in the one trade and if a particular stock cannot be borrowed, the pair trade cannot proceed. Additionally the margins available through a pairs trading approach can sometime be small given the high degree of shared risk factors, requiring leverage to boost portfolio returns. As a result it is not uncommon for pairs trading approaches to have higher leverage ratios and warehouse hidden risks.
Equus Point Capital is different in that the strategy’s short positions are independent of any long position and should a particular stock be unavailable to borrow, we simply short futures in lieu.
We are not sector neutral
We find sector neutrality can dilute alpha potential. For example, being long and short stocks in a sector for neutrality purposes where those stocks are highly correlated and tend to move in unison (for example gold, real estate or the large banks) can offset potential alpha generation where the sector itself is contributing to stock momentum.
Our sector exposure is a function of the stock selection process. We will tend to have an exposure to particular sectors that have a deep pool of potential candidates (i.e. where a sector has a long list of constituents) and where the sector itself exhibits trendiness.
We are not style neutral
Obtaining a neutral exposure to style or factors (value, size momentum, volatility, quality etc.) can dilute any potential alpha source. Effectively the risk management process can dissipate the alpha generation process leading to poor outcomes.
We are unambiguously seeking to harvest the momentum premium. Our research and numerous academic studies support the existence of the momentum premium in the local equities market with risk and return attributes superior to other factors.
We are best described as beta neutral
Given we measure the weighted average beta of the long and short portfolio and deliberately hedge out remaining beta risks to ensure the total portfolio positioning is within acceptable boundaries, we would propose we are best described as beta neutral. In effect we are seeking to remove the individual market return component (beta) of each stock to capture pure idiosyncratic stock return (alpha).