Dalton’s head of European equities Leonard Charlton, who has managed the hedge fund since November 2006, will run the new Melchior Selected trust European fund. Charlton, a former portfolio manager at GLG and trader at Goldman Sachs, has 11 years experience in trading and investment. He will use the full Ucits III powers, including leverage and derivatives, to replicate the hedge fund’s investment strategy with a Ucits III framework.
Ucits III has some advantages for investors that hedge funds do not have, such as daily liquidity and better regulation. Unlike hedge funds, Ucits III funds cannot short stocks directly, so Charlton and his investment team will use derivatives to create synthetic short positions in the portfolio.
The fund aims for positive returns regardless of market conditions and will comprise 30 to 60 positions. Stock ideas are generated through a combination of top-down and bottom up analysis, and are researched using both quantitative and qualitative methods. The first point in analyzing any stock is to understand the quality of a business and what is driving growth.
Charlton and his team will have the flexibility to invest in companies of any size, country and sector, but will invest mainly in bigger companies because they are the most liquid. The fund will avoid sectors that the team does not understand, such as pharmaceuticals, biotech and technology, and those that lack transparency.
The fund will be actively traded to benefit from short-term share price movements and reduce risk. He will be wary of consensus views and will use leverage only when he feels it is reasonable and appropriate.
Charlton achieved positive returns in 10 out of 12 months in 2008 while running the Melchior European hedge fund, which also produced positive returns in 2009. His long and short trading skills have been put to the test in tough market conditions and this experience will be useful.
However, a successful track record in hedge funds does not guarantee success in a more regulated and restricted environment.