Why is your fund a ‘fund to watch' and how could it work in an investor's portfolio?
We believe it makes sense for investors to consider MDT Market Neutral as a way of diversifying portfolios that may already be heavily weighted toward traditional long-only equity and fixed income exposures. Adding more strategies to a portfolio doesn't automatically create diversification if the new components end up highly correlated – and this is the gap this strategy is designed to fill.
We seek to build portfolios with an equity beta target of zero: a low sensitivity to overall market movement. The aim is to do this while also seeking to generate a positive return above the risk-free rate.
Because of that low correlation to major asset classes, we believe MDT Market Neutral can fit well as a liquid alternative alongside traditional holdings, providing a durable, all-weather component that offers attractive return potential with reduced sensitivity to broad market swings, and the potential to dampen overall portfolio volatility over time.
Can you give an overview of the team running the fund and your investment process?
Our team has been running a market neutral portfolio since 1997. The investment process is straightforward: we construct portfolios by taking long positions in stocks that our model forecasts to have positive alpha, and by shorting a roughly equal amount of stocks with negative alpha forecasts. But, of course, there's more to it than that. We use a multi-factor quantitative model that evaluates each company in the universe by identifying the unique combination of factors most relevant to predicting its excess return.
Through continued research and the machine learning techniques we began using early on, the process can recognize different company types and attributes that have tended to outperform or underperform over time – giving us a broader, more diverse set of potential alpha sources across the universe.
What do you see as the big opportunities and risks for your strategy?
Opportunity-wise, we think the case for diversification is stronger than ever. Because we aim for low beta and low correlation with major asset classes, the strategy offers something genuinely different from adding another long-only manager to the mix: real diversification rather than the illusion of it. Our continued investment in our machine learning-based investment process also means the alpha engine keeps identifying new, more granular combinations of factors. This broadens our opportunity set over time rather than narrowing it.
On risk, the biggest structural consideration is leverage. Portfolios typically hold around 400 names between long and short positions, using modest leverage (roughly 1.6x-1.8x) to achieve the desired exposure. Employing leverage in that way is an essential component of our investment process, but it also means risk management has to be front and center: there will always be market environments where any actively managed portfolio struggles, and leverage tends to make those episodes more pronounced. We address this by investing in diversified alpha across the portfolio, using a proprietary risk model incorporating company volatility and cross-company correlations, diversification constraints, and explicit evaluation of trading costs.
We'd also note that, unlike some market neutral strategies, our portfolios invest only in equity positions on both the long and short sides and avoid derivatives. This makes the risk profile more transparent and easier for clients to understand, even if it means we forgo some of the more exotic hedging tools other managers use.
Can you identify a couple of key investment opportunities you are playing at the moment in the portfolio?
MDT's process is explicitly bottom-up, with no macro or sector bets. What this means is that there is no "top stock pick" or thematic call to point to in the way there might be for a concentrated fundamental fund. Instead, our focus is to continue to seek to provide durable, all-weather alpha with a low correlation to market swings. That's where we see the key opportunity for investors in MDT Market Neutral.
