Q: What is the history of the company and the fund?

Dearborn Capital Management (DCM) launched the Grant Park Multi Alternatives Strategies Fund (Multi Alt Strategies Fund) in January 2014 after completing a three-year analysis with EMC Capital Advisors (EMC) to create a low-cost mutual fund designed to execute a robust, multi-strategy, liquid alternative program that does not charge underlying incentive fees. DCM is the fund’s adviser and EMC is the sub-adviser; they have collaborated on alternative investment funds since 1989.

EMC is a registered investment advisor that was founded in 1988 to develop and execute systematic, quantitatively-driven global investment programs. Our catalog of multi-faceted investment programs is driven by analyzing market price movements across the global managed futures markets to identify price trends that allow for potentially profitable long or short investments. As part of this approach, we establish disciplined risk management designed to avoid excess concentration and strict loss limits prior to execution, embedding them in each investment. 

The Multi Alt Strategies fund is an alternative investment product that targets low correlation to traditional investments. This low correlation is achieved by the execution of multiple, independent strategies that create a diversified portfolio, by the program’s strict risk-control measures, by the daily active resizing and management of the entire portfolio and by the outlook to profit during rising and falling market conditions.

From inception through June 2016, the Fund has an annualized rate of return of 7.08% and a standard deviation of 9.17. Currently, assets under management stand at $275 million. 

Q: What is your investment philosophy?

EMC’s investment philosophy is based on two premises. All relevant information is reflected in the market price, and quantitative analysis is the most effective method to access information contained within the price. As technical studies of historical price data consistently yield identifiable and repeatable investment opportunities, EMC has developed and implemented trend following and momentum based systems to capture these opportunities. 

Our systems are rules based, and look to capture directional price movement over different timeframes, during different market cycles and conditions, and across many global financial and commodity markets. EMC lets winning trades run and actively cuts losing trades.

Portfolio diversification is a core element to EMC’s philosophy and begins by investing across global markets. In financial markets, EMC has an investable universe of currencies, equity indices, and fixed income investments. In the commodities markets, the investable universe includes energies, agricultural products, and metals investments.

At any moment in time, EMC’s programs typically identify investable trends in some or all of the target markets. This element of “selective engagement” is another aspect of diversification. Historically, periods of significant geopolitical and global disturbances frequently create larger scale prices trends that impact multiple sectors simultaneously.

Q: How is your fund different from other multi-strategy funds?

Frequently, fund managers may use multiple managers to implement a multi-strategy investment program. Each manager adds a unique investment style or sector focus to the portfolio. 

In the case of the Multi Alt Strategies Fund, each of the four distinct strategies EMC has developed operates completely independent of the other strategies. Since inception, the low-to-negative correlations across strategies produce a performance profile that demonstrates a lower risk-adjusted performance profile.

Q: Would you highlight the sub-strategies that drive your multi-strategy approach?

Four sub-strategies comprise the fund’s multi-strategy approach: 

A short-term interest rate sub-strategy was designed to react to fluctuations in short-term interest rates by investing in fixed-income opportunities across the globe. It is nimble and unconstrained and can go both long and short; this strategy benefits from prolonged periods of rising or falling rates. The systematic nature of the strategy has allowed us to successfully capture unforeseen global moves into negative interest rate territory. 

In the commodity sub-strategy, we seek to create a unique returns profile that is driven by the cyclical nature of commodities markets. We look for profitable opportunities in energy markets, including crude oil, unleaded gasoline, and natural gas; in agricultural products, including corn, sugar, lumber, and cattle; and in metals markets, including platinum and gold. 

The commodities trading strategy can go long or short with equal ease, allowing us to capture price movement from disruptions in supply and demand, changes in production costs, or broader market disruptions. These factors drive the sub-strategies low intra-fund correlations. 

The third sub-strategy, long/short global financials, responds to developing global macro trends and trades in the world’s major currency markets, in both short- and long-term interest rate futures and in international stock indices. 

The sub-strategy can invest long or short and allows us to profit by responding quickly to price movements during periods of economic duress and geopolitical turmoil, as well as when economies prosper. 

The last sub-strategy of the Grant Park Multi Alternative Strategies Fund is a long-only strategy that invests a portion of the Fund’s assets in a globally diversified basket of exchange-traded funds (ETFs), sovereign debt, and gold. Positions in this strategy are actively rebalanced. 

EMC’s research data shows a great degree of upside bias in the equity markets and, to a lesser degree, in fixed-income and gold. The long-biased sub-strategy adds additional non-correlation to the overall Fund and serves an important role to smooth returns when the other strategies experience periods of directionless price movement. 

Q: What is your research process?

EMC’s edge is our intellectual property. We have invested a considerable amount of capital into proprietary software and infrastructure, which allows EMC to research and build sophisticated, real-time investment management systems. 

Our quantitative process is based on the design and development of genetic algorithms, which solve problems in a way similar to natural evolution. Using these algorithms, our proprietary programs can automatically recognize complex patterns and analyze the probabilities of successful trading at certain price levels. This insight, in turn, allows us to generate initiation and liquidation signals in different markets.

Every trading system is driven by multiple parameters on how to initiate, when to stay out of a market, and when to liquidate. When optimizing a trading system, EMC strives to determine the best value for each of its parameters. The genetic algorithms allow us to accelerate this optimization process by efficiently testing a large universe of possible values in a short time 

Three core concepts ensure hypothetical testing is reliable and that its results can be repeated in live trading.

First, the algorithm generates an initial population of test parameters then performs runs that simulate the process of natural selection: from each generation, the highest-ranking parameter gets a higher probability of propagating to the next generation – hence the name “genetic algorithm.” 

Second, the research process optimizes systems to a hybrid performance metric, utilizing a combination of mathematical metrics such as sharpe, sortino, efficiency and utility. The hybrid performance metric enables us to design systems with unique characteristics that have a distinct contribution to the portfolio. Some systems are shorter-term in nature while others are longer-term; some systems are more accepting of deviation and drawdown and others are designed to be highly reactive and liquidate quickly. 

Third, EMC uses a Walk-Forward methodology to avoid over-optimization. Initially, an out-of-sample return stream is developed. If our actual trading mirrors the out-of-sample returns, we know we have made valid assumptions in the underlying parameter sets we are using and in the trading systems we are building. 

Q: How does your portfolio construction process work?

Anticipating risk is fundamental to our portfolio construction. For example, in the Multi Alt Strategies fund, a defined risk budget is established for each sub-strategy. Within a sub-strategy, each trading system that seeks to identify investments is also assigned a defined risk budget. Finally, each contract within the overall Fund is assigned a maximum risk budget. This multi-dimensional risk model removes the possibility of over concentration and fundamentally reduces the Fund’s volatility. 

We also measure risk by looking at current market volatility. Our 15-day lookback window is fairly short; a more traditional Value at Risk (VaR) calculation for an equities-type strategy might examine volatility over 40 to 50 days or more. Using a narrower window allows us to react more quickly to changing volatility. 

Q: How do you define and manage risk?

EMC measures and defines risk at all levels of the portfolio. The maximum amount of risk taken in every market in each sub-strategy is predetermined by a number of factors including the portfolio equity and open trade equity of the fund, individual market volatility, system weightings and market weightings which are based on liquidity, market correlations and historical trendiness of each market.

Risk associated with positions in each market is calculated based on short-term volatility and aggregated at the portfolio level to create a proprietary value at risk for the entire portfolio. This number includes a 97.72% degree of confidence in how EMC defines maximum risk at any given time in the portfolio.

EMC’s risk management has been built using the same adaptive research process that trading systems use. Individual algorithms are parameterized into building blocks, combined, and then adapted to maximize a portfolio level fitness, which is called utility. Strict protocols are followed to quantify and limit risk at all levels of the portfolio, from sizing the initial trades, to stop losses, to limiting risk in any one market or sector. 

Generally, when risk is increasing in the portfolio, it suggests that markets are either beginning to trend or are in trends; these increases in volatility are reflected in our internal VaR number.

Because we are active traders, we participate in this type of price movement, so our risk will be a little higher – but it is a calculated risk based on research, on probability, and on the highest trade expectation, expectation that is better than what we would find in a more consolidated, directionless, non-momentum period. 

Our trading systems are designed to cut our losses. When trends are reversing or momentum is waning, and markets begin to turn and go the other way, the strategy will either take losses across the board or in specific markets. 

At a philosophical level, we manage risk by diversifying it in as many ways as is possible. We try to diversify risk geographically across many markets, and further spread it out through the multiplicity of our trading systems.