Paladin Long Short Fund is a concentrated mutual fund, with an objective of capital appreciation. Capital preservation during periods of market turmoil is a secondary goal of the fund. Unlike many mutual funds which hold 100-250 individual positions, the Paladin Long Short Fund will generally contain a portfolio of 25-35 positions. In terms of size of company, the fund will usually focus on equities over $250 million in market capitalization, although some exceptions will occur. A portion of the portfolio will be reserved for ‘long’ positions (those that benefit from rising asset values); against this a portion of the portfolio will will either be held in cash and/or ‘short’ positions (those that benefit from dropping asset values). Examples of short positions would be put options, inverse ETFs, or short positions in individual stocks. Exchange traded funds (ETFs) that focus on commodities, currencies, broad baskets of stocks, or bonds may also be utilized. A portion of the fund may be held in cash, and in some cases high levels of cash may be held. Through this mix the fund’s intent is to be relatively uncorrelated with the general market on a day to day basis.
Decisions on what proportion of the portfolio should be invested in the market, and which specific securities are utilized, are based on a three pronged approach
(i) ‘top down’ macroeconomic analysis
(ii) ‘bottom up’ company and sector analysis, overlaid with
(iii) technical analysis.
1. Top down macroeconomic analysis entails an assessment on general economic trends.
2. Bottom up company or sector analysis focuses on finding secular or cyclical themes both within a broad sector of the market, or specific companies.
3. Technical analysis (AKA ‘charting’) is a discipline for forecasting the direction of prices through the study of past market data, primarily price and volume.
More specifically a framework of how to position the portfolio in terms of broad weightings is based on a combination of macroeconomic analysis and index technical analysis; the latter focusing on the S&P 500 and NASDAQ.
Individual stock selection for the long side of the portfolio is based on secular or cyclical ‘higher’ growth opportunities, combined with relative strength characteristics within the technical analysis realm.
For the short side of the portfolio, vulnerable characteristics in either the fundamental story or technicals will be the focus.
In general, most positions will be incrementally built up or reduced, leading to higher than average turnover rates. The average holding period of positions is completely market dependent.