Morgan Stanley FundLogic Alternatives Platform

Manager conference reveals broad range of views

HAMLIN LOVELL

The Morgan Stanley Multi-Asset Platform enables investors to choose from an extensive range of strategies across asset classes. This unique cross-divisional approach allows investors to choose from different flexible investment vehicles (i.e., UCITS and non-UCITS funds, swaps, certificates, notes and shares) across asset classes. Since inception in 2006, its assets have grown from a few hundred million to over $5.3 billion (as at September 2013), across more than 60 strategies within fixed income, FX, commodities and equity.
 
The FundLogic Alternatives Platform, as part of the Multi-Asset Platform, reached $1.5 billion this year and offers investors access to systematic and discretionary strategies, applied to the main asset classes of equities, bonds, fixed income, credit and commodities, and also options, convertible bonds and asset-backed securities. Investors can obtain access through a variety of vehicles, including swaps, shares, notes, certificates, UCITS funds and other fund structures.
 
FundLogic recently added Broadmark, Dalton and TCW to its offering, and is set to launch more funds in 2014 to complete the range of strategies on the platform. By 2014, four funds on the platform will have at least three years’ UCITS track records, while many of the management companies have been running money since 2000 or earlier.
 
This conference review feature describes some themes that are being pursued by a selection of discretionary FundLogic strategies that are available as daily or weekly dealing UCITS funds, and whose managers presented at events in London and Geneva this November, attended by The Hedge Fund Journal's contributing editor Hamlin Lovell.

Views on US equities
Since mid-2012, correlations between and within equity markets have dropped, whether measured between geographies, sectors or stocks. It is therefore worth examining how funds are directionally positioned at present – those that make the right calls on countries, industries and stocks have generated a lot of alpha. With US equity indices recently touching all-time highs, we start by looking at how two managers view the world’s largest equity market.

Although $2.8 billion equity long/short manager Ascend Capital has generated most of its returns since 2000 from alpha – with more coming from the short than the long side – Ascend still has directional opinions on equities. While Ascend launched its first fund on 1 January, 2000, the founder and CIO has been managing long/short equity portfolios since 1994. Malcolm Fairbairn began his career in 1994 at Los Angeles-based Strome Susskind, which was one of the largest hedge funds worldwide in 1994 and was then recruited by Ken Griffin to Citadel to set up their first long/short equity strategy. Currently, Ascend sees three key positives for US equities: housing, energy and the declining deficit. The recovery in US housing is gathering momentum with prices up 26% year on year and Ascend thinks that this is only the beginning. Supply remains constrained after years of under-building, it is now cheaper to buy than rent,and they expect residential construction as a percentage of GDP to grow from 2.5% to 5% per year as housing starts to return to a more normal level. Housing is special, contends Ascend, due to a huge multiplier effect – one person buying a house can create as many as four jobs.

Energy trends also bode well for the economy, as the US becomes energy independent over the next decade and super-cheap natural gas makes manufacturing more competitive: witness Mexico becoming a cheaper base than China. Ascend highlights chemicals and fertilisers as two sectors particularly well placed to benefit from cheaper energy inputs. The third bullish force for equities is the declining US government budget deficit. This has already shrunk to 3.5% from 10% of GDP over the past few years, and Ascend thinks that nominal GDP growth of 5% (comprised of 3% real growth and 2% inflation) could continue to diminish the deficit. Ascend is also finding valuations compelling – at least for selected large caps.

Broadmark Asset Management LLC is located near San Francisco and was founded in 1999. Broadmark uses a combination of qualitative and quantitative analysis in its investment process. There are four pillars to their approach including valuation, monetary factors, investor sentiment viewed from a contrary perspective and a multi-factor quantitative momentum assessment. Presently, liquidity, monetary aggregates and Fed policy are very supportive of equities, although some valuation metrics are starting to look a little stretched. Broadmark looks at earnings yields based on trailing GAAP profits, and also expands the Fed Model approach to include a wider spectrum of fixed income assets, such as Treasury bonds, notes and corporate bonds, high-yield bonds and others. Currently Broadmark’s sentiment models are negative across the board as there is overwhelming optimism among the “wrong-way” crowd.

Broadmark also monitors quantitative factors including a volume breadth momentum model, and has found that this analysis can help to gauge the strength of trends. However, whereas traditional trend followers tend to build positions after a trend has begun and do not reverse positions until markets retrace, Broadmark aims to obtain maximum exposure at an early stage of trends – and will fade a trend when they think trends are getting extended. While many long/short funds are content to capture two-thirds of equity market upside and suffer one-third of the downside, Broadmark’s strategy has historically captured about 50% of the upside in the S&P 500, while participating in essentially none of the downside on an annualised basis. Being net short at times in 2008 helped to produce a profit for that year. Broadmark currently manages nearly $2 billion in assets.

Asian equities fertile for stock-pickers
Jamie Rosenwald of Dalton Investment, profiled in a feature earlier this year in The Hedge Fund Journal, has invested through both the late 1990s Asian crisis and the global credit crisis of 2008. Dalton today is net long Asian equities but not through indices. Dalton are deep value, fundamental stock-pickers who are very selective about which stocks they want to own. Dalton sees significant value in many Chinese and Hong Kong companies, trading at half or even one-third of book value, which sometimes equates to “getting paid dividends to own call options”. Dalton’s pan-Asian vantage point will sometimes lead them into companies that have a strong presence in both Japan and China, including Singapore-listed Global Logistics.

Dalton is unambiguous about their style representing pure value; they are not seeking GARP (Growth At a Reasonable Price) or trying to time the risk-on/risk-off moods of markets. Dalton holds long stocks on average for years, so has a private equity mentality of looking for great business models that they would be happy to hold forever. Dalton is particularly sensitive to company management being aligned with external shareholders, so they seek out companies that “want to create wealth and share it with minority shareholders”. This type of partnership investing means Dalton has to feel completely comfortable that the social status and reputation of families controlling companies contribute to their continuing business success. The short book contains banks in South East Asia.

The Hedge Fund Journal’s UCITS Hedge profiled the launch of the Indus PacifiChoice Asia Fund in 2011. Indus is a long-term believer in the Asian growth story and has historically focused on long as well as short ideas, although Indus is always searching for interesting shorts, and “the universe of potential shorts in Asia has expanded considerably over the past decade,” according to Theron de Ris. Indus thinks Asia is ideally suited to bottom-up stock-picking as its companies “range from world beaters all the way to occasional frauds”. Like Dalton, Indus finds many of its longs in China and Hong Kong. One larger holding is Shanghai-listed A share Daqin Railway, a state-owned enterprise paying a dividend yield of 6%. Daqin Railway is currently enjoying rate increases, generating free cash flow and expanding its network. The vast majority of rail assets in China are still state-owned and unlisted and Daqin Railway will likely continue to enhance corporate value by acquiring state rail assets cheaply.

Other longs within a China infrastructure theme include a city gas distribution company, Towngas China, and the operator of Beijing Airport, Beijing Capital International Airport. Beijing Airport has over twice the passenger throughput as Sydney airport, yet Beijing Capital’s enterprise value is less than half that of publicly-listed Sydney Airport. Indus manages approximately $5.9 billion as of 1 November, 2013 and the “partnership culture” prioritises performance over asset-gathering. The team is heavily co-invested in its own products, including in the PacifiChoice Asia Fund.

Abenomics disciples ahoy in Japan
Indus has generated strong profits out of Japan this year, more so thanks to a policy of hedging yen exposure. Japan remains about half of net long exposure in PacifiChoice Asia Fund, at the high end of the historical range. Indus remains constructive on Abenomics, noting that Abe’s cabinet enjoys the support of both houses of the Japanese legislature as well as “the man on the street.” Indus also sees Japanese monetary policy staying “looser for longer” because inflation targets may prove difficult to achieve within the projected time-frames. Japan arguably offers amongst “the best cyclical profit growth profiles in the developed world this year and next year,” according to Indus, which reckons that Japanese stocks are valued at around 14 times forecast 2014 profits. What emboldens Indus today is that the technical backdrop is not extended in the way it was in May of 2013 – and “opinion has become more two-sided rather than uniformly bullish,” according to Theron De Ris. Indus believes Japan has been a particularly fertile hunting ground for bottom-up investment ideas all year on the back of a recovery in domestic consumption. Recently listed $1.6 billion market cap holding Zenkoku Hosho, the leading independent mortgage guarantor in Japan, is a case in point. The company is winning market share in a growing mortgage market while credit costs remain low, and regulation is in their favour. Zenkoku enjoys amongst the highest returns on equity in the Japanese financial sector yet only one local broker rates the shares. Indus also continues to find and research short ideas in Japan, though short position sizing is currently below the fund’s historical average.

Dalton in contrast has turned cautious on Japan: in early 2012 six oftheir top 10 longs were Japanese and now none are – although three of their top five shorts are now Japanese equities, including a consumer electronics conglomerate that has become a hedge fund long du jour.

Recently macro manager Stephen Jen of SLJ Macro Partners has been developing a dialogue with senior Japanese officials, as well as reconnecting with those in neighbouring China and other emerging markets with whom he has spoken for many years. In Japan, Jen has been playing the reflation story with short yen and long Nikkei positions.

Big banks becoming utilities
$1.6 billion financial sector-specialist Algebris was spun out of TCI (The Children’s Investment Fund) in 2006 and was last featured in The Hedge Fund Journal in August 2011, when we profiled their contingent convertibles strategy; co-founder Davide Serra was also selected as one of our Tomorrow’s Titans in the 2012 survey sponsored by Ernst and Young.

Algebris research suggests that investors should not under-estimate just how unusual it is for any industrial sector to underperform for five years or more. On the rare occasions when this occurs – roughly once each decade – the sector in question tends to enjoy very strong subsequent performance. Financials have recently undergone a five-year period of under-performance, as banks have rebuilt their capital bases by around $500 billion, via issuance and cutting dividends. This process continues in Europe as banks cleanse their books before supervision transitions to the ECB. Already many large, systemically significant banks have bolstered their balance sheets to levels well beyond what the new Basel rules require, according to Algebris COO, Alex Lasagna.

On top of the mean reversion “Cinderella sector” argument, Algebris finds other reasons to own banks. Regulated and cash-generative banks now look like utilities, and could by 2015 be paying dividend yields in the region of 6-7%. Algebris thinks that banks such as BNP Paribas, Soc Gen, Citi and UBS could afford such dividends and that some banks trading at between 0.5 and 0.9 times book value are simply too cheap relative to the return on equity they will be able to generate a few years from now. Given that loan durations average five years, most of the dubious pre-Lehman era loans are now rolling off banks’ books, which raises hopes of improving credit quality unleashing the release of conservative provisions – and this scenario can unfold even if economic growth stays slow.

Cost-cutting could also help banks get return on equity up to 15%, Algebris estimates. Consequently the fund is net long by around 60% although Algebris is selectively identifying shorts, particularly amongst more peripheral banks that still need to raise another $50 billion of capital. The net long position in Europe is higher than in the US as Algebris thinks some European banks are lagging behind those in the US in terms of valuation.

Algebris is of the opinion that Japanese banks are as cheap as those in Europe. Algebris will occasionally buy perpetual bonds for high yields, but would only invest in the subordinated debt of systemic banks.

A hybrid approach
The Salar Convertible Absolute Return Fund (SCARF) was launched in 2010 to combine the best ideas from Ferox’s long-only fund (daily UCITS) which returned 41% in 2009, and its short-biased (Cayman) Bear fund, which returned 31% in 2008. SCARF has so far done better than maintaining equal allocations to the long and short strategies. SCARF has achieved double digit gains this year (+9.6% ytd) with strong risk-adjusted returns – one-year Sharpe ratio of 3.4x. Furthermore, throughout its 37-month history, the fund’s largest monthly loss of -1.4% (May ’12) demonstrates its pedigree as a capital preservation tool.

SCARF is a market-agnostic fund – it has no structural bias toward being long or short and combines two styles of trading convertible bonds. Firstly, it uses long-only trades that buy convertibles with good credit fundamentals close to their bond floor. The embedded equity options provide potential for significant performance in rising equity markets. The second strategy protects the fund in falling markets through simulated put options; buying deep in-the-money convertibles and hedging the underlying equity exposure. These trades profit from the short equity hedges falling faster than convertibles, which are underpinned by bond floors. Ferox credit analysts also conduct extensive credit research, focusing on bonds with short-dated maturities (12-18 months) in order to become comfortable with their bond floors.

Overall exposure in the portfolio can naturally move from net short to net long, or vice versa, at different points in time. The fund made money during two turbulent months for equities – March 2011, which saw Japan’s tsunami tragedy, and August 2011, when the euro crisis intensified. Generally a sharp move in either direction can tilt the fund towards a long or short stance.

Ferox was co-founded in 2000 by Jeremy Herrmann, Rupert Mathews and Alex Warren. The firm now manages $1.4 billion, exclusively in convertible bond strategies, and indeed this year Ferox wrote an article “Why does the least loved hedge strategy deliver the best returns?” about opportunities in convertible bonds for The Hedge Fund Journal.

Rising rates and tapering
When the Fed started talking about tapering in 2013, both bonds and equities sold off together – and former star Morgan Stanley sell-side strategist Stephen Jen thinks this may mark the start of a larger shift. If the Fed eventually normalises interest rates, he thinks bonds could sell off a lot further – and Jen insists that the Fed is serious about tapering sooner rather than later. Jen admits that he had expected tapering to be underway by late 2013 – and he had also envisaged Larry Summers instead of Janet Yellen being nominated as Fed chairman – but Jen has stayed true to his core view that the Federal Reserve will have to start scaling back its asset purchases.

“The Federal Reserve is first and foremost” amongst Stephen Jen’s policy contacts. “Policymakers do not dictate trends 100% but they play an important role in shaping where asset prices go,” he points out. Jen explains how he visualises market action as being driven by three pillars: macro fundamentals, market positioning and momentum, and policy. Policy has gained in importance in recent years, he says: “Five years ago the first pillar – fundamentals – mattered the most, but now policies have so many more dimensions and go much further than before, in all countries, not just the US.” Right now Jen has noticed a sharp divergence opening up between Federal Reserve and European Central Bank Policy – and thinks some triangulation is needed to grasp the repercussions of this. “It creates a very rare environment where the two biggest central banks are going in opposite directions,” he surmises. Whereas the Federal Reserve has set out plans for tapering, the ECB has cut interest rates and there is even talk of some form of negative interest rate policy.

These policy agendas feed into the fund’s trade ideas. One core theme is owning the US dollar, partly because “the US is an oasis of growth,” he says. Valuation differentials are also important: “Economists might disagree on the extent of undervaluation, but it’s not overvalued as tourists find the US cheap,” he explains, and adds that relative unit labour costs in the US are the most competitive in 30 years. What Jen finds really striking is that the gulf between US and Canadian productivity actually dwarfs the gap between German and Spanish unit labour costs. And, crucially, the US and Canada still have room to manoeuvre currencies whereas Germany and Spain are in the straitjacket of currency union.

Jen sees a sea change in market dynamics in 2013, and indeed nearly all of the returns he has generated since inception November 2011 have come this year. He admits that 2012 was not the best climate for macro trading due to a lack of differentiation and trends. For several years almost all asset classes had been rising in a synchronised way, whether they were traditionally high-beta assets like the Australian dollar or low beta such as the Swiss franc.

Jen thinks that Draghi’s apparent willingness to maintain accommodative policies is partly down to Europe’s broad-based and deep-rooted problems, which Jen enumerates as “structural, logistical, institutional and political”. These many issues may or may not translate into trading opportunities, but Jen does think the euro/dollar exchange rate could go lower, “as Draghi has made it clear that the ECB policy path will be very different from that of the Federal Reserve.” Jen’s intermediate target for the euro/dollar exchange rate is 120, and he thinks it could fall further.

Jen has also been characteristically early in turning sour on emerging markets where he sees “legacy problems from excess reserve holdings arising from massive amounts of capital inflows.” Jen’s calculations suggest that cumulative inflows have mounted up to as much as $7.7 trillion, an unprecedented amount, and cautions that “exit doors are the same size as 10 years ago.” Jen ominously observes that the volumes of redemptions seen so far are tiny versus the size of the inflows – and his conclusion is a warning that “a sudden stop event could be very violent.”

Los Angeles-headquartered TCW tries to find fixed income securities that will ride out rising interest rates, and also wants to stay nimble enough to take advantage of sell-offs when they occur. TCW, which acquired Metropolitan West Asset Management in 2009, tends to run duration of between minus three and plus eight years, and presently has low interest rate exposure at around 1.5 years. Whereas TCW sees larger funds being driven into derivatives markets that TCW views as fairly priced, TCW relies heavily on security selection and easily met redemption requests in 2011. TCW argues that their smaller size – with assets of $2.5 billion in the unconstrained or similar absolute return strategies – allows them to build up meaningful positions in smaller segments like non-agency mortgage securities.

Non-agency mortgages are just one type of asset-backed security where TCW thinks their “state-of-the-art modeling capabilities” can help to analyse tens of thousands of highly heterogeneous and unique securities that fall below the radar screen of investors who concentrate on large benchmark positions. Emerging market corporate bonds are another area where TCW has been active for more than 10 years.

TCW’s experience has taught them that performance dispersion between segments of the bond markets can be very wide over short periods – but it tends to re-converge over the long term. TCW states that “patient value investors” benefit from the mean reversion behaviour of fixed income markets. Currently non-agency mortgage securities are TCW’s largest sector weighting at near 30% of the fund, since TCW still finds value in them with an expected mid to high single-digit base case return, and even more potential for better returns if the housing recovery continues. The technical dynamics are also looking good for the $850 billion non-agencies market with supply falling due to lack of new issuance, pre-payments and defaults. In contrast, TCW is concerned about liquidity in high-yield bonds as dealers have scaled back inventories at a time when more supplyis coming on stream. Additionally, high-yield and emerging market bonds were most sensitive to taper talk this year, so TCW is keeping these weightings down. Overall TCW believes “that we will have opportunities to buy bonds cheaper in future.”

Algebris has also positioned its book with the aim of owning longs that profit from rising interest rates while shorting stocks that are expected to suffer from a normalisation of rates. The collapse in correlations between stocks within the financials space, from close to one three years ago to the wide dispersion we see today, improves the opportunity set for security selection. Algebris expects higher rates in general and a steeper yield curve in particular to enable banks to expand their net interest margins – and there are many other sub-sectors within financials that can benefit from higher rates in different ways. For instance, higher discount rates will relieve balance sheet pressures for some types of insurers and increase interest income for other types.

Meanwhile, Algebris thinks property and mortgage REITS (real estate investment trusts) could be vulnerable to higher rates. Similarly, some emerging markets stocks could continue to suffer from normalisation of US policy, and Algebris has already been short of some Hungarian and Brazilian names this year.

Pan-European consolidation and rationalisation
More than 20 years after a single European market was supposedly created in 1992, it is clear that many industries remain fragmented by national boundaries. Algebris says that European politicians are concerned to see small companies in Spain paying 15% to borrow while those in Germany do so for 7%. Therefore, Algebris sees some political impetus behind cross-border consolidation of European banks, and their fund is positioned to exploit this trend. Merger activity in European telecoms is catching the eye of other managers – as is innovation globally in the phone sector.

Smart phone technology opportunities
Smart phone technology has produced a “ten-bagger” investment for Dalton. A Korean-listed company makes display drivers in Taiwan for phone screens. Dalton has been a strategic investor alongside management who own 30% of the company, and since 2011 the shares have appreciated tenfold.

Algebris has a team and an analyst dedicated to following financial technology, which is one of their key three themes, as “banks move from a Walmart to an Amazon business model”. One high-conviction holding is Monitise, which develops banking applications for smart phones. Monitise already has 300 customers including HSBC, Lloyds, RBS and banks in US and India. The business model generates around $7 of recurring revenue per year from each user – the number of which has already quadrupled to 25 million in a few years. Monitise is targeting 100 million users, and if this is achieved Algebris think the stock could be on a low single-digit PE multiple.

In contrast, Ascend argues that “value-based technology investing is often a trip to the graveyard,” and cites Nokia as an example of a “legacy tech nursing home” stock of the type they like to short.

Research team structures
Ascend ascribes much of their success to their seven sector-specialist teams, which are expected to outperform by 3-5% per year on each side of the book. Some two-thirds of Ascend’s historical returns have come from stock selection, and although sector selection has also contributed positively, the 10% limit on net sector longs clearly places the emphasis on stock selection. Ascend avoids sub-sectors such as early-stage biotech where they see outcomes as too binary. Ascend follow a “Porter’s Five Forces” approach to fundamental analysis and expects analysts to “Be An Accountant” and “Be A Reporter”, doing over 10,000 meetings per year with companies and analysts. Ascend’s team of 15 MBAs based in India work exclusively for Ascend and handle labour-intensive activities which include crunching accounting numbers and updating inputs for valuation models. Having once run a quant fund means Ascend has the infrastructure to identify unusual changes in fundamental factors that are predictive of stock price movement. The process has not only generated a hit rate of 65%; winning positions also contribute more than losers detract.

Dalton is often characterised as a hedge fund within countries – an ex-MIT analyst was recently hired to handle India. In fact, Dalton says they are “all generalists” and there is plenty of seamless idea sharing amongst the Tokyo, Shanghai and Los Angeles offices. “Ultimately everyone has to get Jamie Rosenwald’s buy-in”. This process has worked well – the flagship fund has annualised at 9%, after fees, since 2009 against an MSCI Asia Pacific equity index roughly flat over the same period.

Indus is distinguished by an experienced analyst team with dedicated analysts for each of its three flagship funds. There are also analysts who straddle several funds and the PacifiChoice Asia Fund benefits from the collective teams’ most compelling research ideas. In total there are 27 investment professionals at Indus, comprised of seven portfolio managers and 20 analysts spread around the globe, with nine investment professionals in New York, seven in Hong Kong, four in Tokyo, three in San Francisco, three in London and one in Mumbai. Trading takes place 24 hours a day, six days a week from Stamford, Connecticut.

Philadelphia-based $9 billion manager Turner was founded in 1990 and allocates assets equally amongst sector teams at the start of each calendar year. Sector specialists have impressive pedigrees. Global financial services specialist David Honold only lost 3% in 2008. The global medical sciences manager, Vijau Shankaran, is one of two medical doctors on the team, and was previously at Caxton. In global consumer, Jason Schrotberger came from Blackrock and takes a shorter-term approach because same-store sales are so important. The multi-sector large cap, and small cap, specialists also have their own styles. The large cap manager likes quality so will often lag during a “dash for trash”. The small cap manager is often involved with post-reorganisation equity.

Remuneration structures
Some funds like to keep their bonus policy confidential and discretionary, while others are open about the formulae used to determine bonuses. The simplest policy is to reward everyone according to overall firm profitability, but many funds are following more bespoke approaches.

Ascend for example thinks “stock selection is the purest form of alpha, is what investors should pay most for, and is therefore what Ascend pays most for.” To this end Ascend carries out an attribution exercise that decomposes each team’s return into broad market beta, sector allocations and stock-specific returns.

Turner pays its people on a three-pronged formula, which includes returns, risk-adjusted returns, and what Turner terms “lock-downs” – meaning a 5% drawdown. “A lock-down costs you 20% of your bonus” – and these penalties, when levied, are re-allocated to the overall bonus pool. This type of pay structure certainly focuses the mind – Turner has not yet seen a drawdown above 4.5% at the fund level. Many funds on the platform encourage co-investment by their managers, and in many cases besides those mentioned, investment teams “eating their own cooking” account for 10% or more of assets.

UCITS restrictions – High liquidity not low volatility
The FundLogic platform showcases the diversity of UCITS in housing funds that target volatility or drawdowns below 5%, as well as those that have experienced volatility five times as high.

When the Algebris Financials Fund lost more than 30% in 2011, has made more than 30% so far in 2013, and has annualised at 24% volatility, it should be clear that UCITS does not have to mean low volatility or diluted volatility. This fund does have a Value at Risk ceiling, but it is defined in relative terms as double the VaR on the MSCI world financials index. Some other funds on the platform also define VaR relative to a benchmark rather than in absolute terms.

Two other funds have even decided to set higher risk targets for their UCITS than for other investment vehicles they run. Ascend has a gross exposure limit on its UCITS fund 30% higher than that applying to its “Strategy 2”. Turner’s UCITS has a higher leverage limit, and risk target, than their ’40 Act fund, although so far they have never actually reached its 300% gross exposure limit; the gross has not gone over 185%.

So UCITS does not mean “low volatility” (unless this is targeted by the manager), but it must mean “high liquidity” and this does lead some UCITS funds to express ideas in a different way from funds that have less liquid dealing terms. For their daily dealing UCITS, Algebris need to be able to liquidate positions within seven days at 10% of average daily volumes. So the UCITS caps emerging markets at 30% and will not have the 30% credit exposure that can appear in the offshore fund.

Dalton maintains the same gross and net, geographic and sector exposures in the UCITS as in the offshore strategy. But Dalton may use different names within those country and industry buckets: the UCITS primarily focuses long investments in stocks with market caps in excess of US$1 billion. Historically, Dalton reckons that stocks of this size generated around two-thirds of long performance.

Indus had greater small-cap (stocks with market caps below $1 billion) exposure when the fund was first launched in 2011. Over the past two years, small cap exposure has generally been capped at 5-6% of NAV as the mid- and large-cap opportunity set across the region has remained robust.

The SLJ UCITS has stricter limits than the offshore Cayman fund. For instance, a currency pair only counts as one turn of leverage for the monthly dealing Cayman fund, but both sides are considered for the UCITS, which also adds up notional exposures from options. The UCITS sets a 450% cap on gross exposure, with a 50% limit on net exposure, and tends to have less non-currency exposure than the offshore. The UCITS also caps counterparty exposure at 5% per counterpart.