A robust and repeatable investment process is critical to delivering strong absolute and risk-adjusted returns over the long term. Crescat’s investment process has persistently revolved around three key factors: global macro themes, value-driven models, and prudent risk management.
Global Macro Themes
Our goal in focusing on global macro themes is to provide investors and asset allocators with a unique source of high expected alpha with low correlation to common benchmarks and other managers over time. We believe that getting big-picture investment themes right is key to growing and protecting capital. By focusing on big macro investing themes, Crescat has anticipated and capitalized on many major events, including:
- The US housing and mortgage bust in 2006-2008;
- Oil bull market (peak oil) 2007-2008
- Global financial crisis in 2007-2008;
- Precious metals bull market from 2006-2010;
- Oil price collapse in 2014 and 2015 and again in 2018;
- Biotech run-up and bust in 2014-2015;
- Rise of artificial intelligence from 2014 to 2017;
- Demand for cybersecurity from 2016 to 2018;
- China credit bust and yuan devaluation in 2015 and again in 2018;
- Emerging market contagion in 2018; and the
- US equity and corporate credit market downturn in 2018.
We provide transparency into our themes and the research behind them in our forward-looking quarterly research letters. We also publish research briefs on social media and in the current views section of our website that highlight our latest investment ideas. At Crescat, our model-driven macro themes shape the portfolios in all our strategies. Each individual security in our portfolios is an expression of a macro theme. The themes guide our exposures including both long and short exposures in our hedge funds. Macro themes differentiate Crescat from other managers in terms of our portfolio construction, diversification, risk modeling, and profit attribution.
Crescat deploys proprietary, systematic equity and macro models that guide us to the themes and securities in our portfolios. Crescat’s discounted-free-cash-flow equity valuation (DCF) model has been an essential driver of Crescat’s long-term track record in all of our strategies since their respective inceptions: Crescat Large Cap (1999), Crescat Long/Short (2000), and Crescat Global Macro (2006). On a daily basis, our DCF model systematically scores, ranks, and values the 2000 most liquid global equities that trade on a U.S. exchange based on more than 50 underlying fundamental factors. Our DCF model scores stocks based on:
- Six custom fundamental factor categories: quality, value, growth, fundamental dynamics, capital allocation, and balance sheet strength;
- Four custom equity classes: defensive, growth, cyclical, and emerging growth; and
- Three comparative, within-group analyses: all universe, class, and industry
The DCF model was originally developed in 1997 by Crescat’s Chief Investment Officer, Kevin C. Smith, CFA. He and his investment team have continuously refined it and applied it to managing money and producing alpha ever since. The equity model guides us to macro themes based on sector and industry aggregations that flag macro trends and imbalances for the investment team to flesh out and validate through further investigation. Crescat also deploys a variety of macro models to value and time the world’s major currencies, commodities, fixed income instruments based on a wide array of market and economic indicators which also lead us to themes. Both the equity and macro models discover mispriced securities with fundamental catalysts for change. Our models drive our investment decisions, triggering timely, well-supported entries and exits.
Prudent Risk Management
At Crescat, capital preservation is paramount. But protecting capital does not have to come by sacrificing returns. We believe in accepting a moderate amount of risk within the context of a risk model in order to realize the long term returns that our themes and valuation models are capable of delivering. We use a Conditional Value-at-Risk Model to adhere to risk limits by theme and by overall portfolio in all of our strategies. Also, we believe in moderate, but not excessive, diversification as a key tenet to reducing risk without sacrificing our return goals over time. We continuously strive to maintain a diversified set of high-conviction, model-supported themes and positions within the context of our risk model.
Crescat’s goal is to stand out versus peers and passive benchmarks by delivering proven, high risk-adjusted returns based on statistics such as Alpha, Sortino Ratio, and Omega Ratio over complete economic cycles. We believe these statistic provide better measures than the popular Sharpe ratio of our goal of maximizing client utility over the long term by delivering positive, asymmetric returns compared to benchmarks. To understand why investors might prefer that we focus on delivering a high Alpha and Omega rather than delivering a high Sharpe, see this excellent white paper. While past performance is no guarantee of future returns, we strongly believe that adding a reasonable allocation of Crescat’s global macro-oriented strategies to a portfolio mix of traditional, passively managed asset classes will reduce volatility and improve returns over complete business cycles as we have demonstrated historically.
By being grounded in valuation and following risk controls, our process is designed to give clients the fortitude to withstand short-term drawdowns in pursuit of high long-term alpha and absolute return. Crescat’s strategies are designed for long-term investors who believe in Crescat’s investment process. They are not for short-term investors who are likely to be shaken out by one of our inevitable drawdowns. Given our valuation-model approach to entering and exiting positions, we are confident that our portfolios are worth substantially more than public markets are quoting them at any given time. Such conviction is key withstanding short-term, mark-to-market losses due to normal but often erratic market behavior and realizing the much larger long-term gains that are possible from our global macro themes and positions. We do not view short-term losses as a permanent loss of capital because we are always confident in our ability to realize the much greater intrinsic value of our portfolios. While we can never be right on all our themes and positions, when we are wrong, we are happy to recognize that and move on. We know that the markets will constantly present us with substantial new themes and opportunities for future strong performance and that our models will guide us there.