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Digital Subscriptions > The Hedge Fund Journal > Issue 141 – Jun | Jul 2019 > DCI’s Market Neutral Credit UCITS and AIF Strategy

DCI’s Market Neutral Credit UCITS and AIF Strategy

Idiosyncratic alpha from corporate credit

Founded in 2004, San Francisco-based DCI was one of the first firms to run a market neutral credit strategy, which launched in 2007. The firm’s unique systematic investment process, including fundamental, quantitative and statistical elements, dates back to groundbreaking academic research in the 1960s. Multiple innovations have been honed and reined over time but the one constant at DCI has been a focus on idiosyncratic alpha, which distinguishes the company from many peers.

DCI CEO, Tim Kasta, asserts that, “most long/short credit strategies are taking some kind of beta risk; or basis risk such as cash versus CDS; or are looking to pick up illiquidity premia; or they may be taking factor risks, such as small cap, value, growth or momentum. Our return stream is not correlated to any of the beta benchmarks, nor to factors, nor to other managers”.

The source of investment returns can be characterised as a pyramid, with beta at the base; illiquidity premia at the next level; alternative beta/ risk premia/style premia further up, and true alpha at the pinnacle. DCI’s strategy aims to be a purveyor of pure alpha – and moreover to extract it mainly from idiosyncratic single corporate security selection.

Performance attribution analysis (using the back-test of the latest models between April 2006 and June 2016) bears this out: of gross average annual returns of 15.8% since 2006, 10.8% came from single name selection and sector exposures made up most of the rest at 4.3%. “While the strategy is run with various constraints including sector constraints, the strategy is not completely sector neutral because analysis has shown that companies in the same sector will often move in clusters,” says Kasta. There have been consistently near zero, and sometimes slightly negative, correlations to conventional asset classes such as equities, credit, and bonds – and no meaningful correlation to factors such as quality, value, size and momentum.

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Informing the Hedge Fund Community. With access to some of the industry’s biggest names and an astute and talented group of writers and contributors, The Hedge Fund Journal has established itself as a trusted source of information on the hedge fund industry.