Diversified Capital Management : Alpha Return

Summary

The Alpha Return program invests in various US Treasuries in a convertible arbitrage-like style. Meaning it holds the debt instruments and collects the interest payments, while using the futures market to take advantage of price inefficiencies and generate alpha.

Investment Strategy

The Alpha Return program purchases cash US Treasuries, which we use as collateral against corresponding short future and short call positions. Because we own the underlying cash Treasury, we have the opportunity to generate income by exploiting price inefficiencies in the futures market with substantially lower risk than if we were simply taking naked shorts. Not only that, but by holding the underlying cash position, we continue to collect interest, known as the coupon every six months. Additionally, by using short futures for price discovery, our periods of biggest gain will occur during down swings in the bond market when traditional bond investments tend to lose.

Risk Management

The Alpha Return has a two pronged-approach to risk management. The first approach is to only liquidate our cash treasuries in a rising price environment or to hold them to maturity. If held to maturity, the only risk on the investment is the default of the US Treasury. The second method of risk management is by managing risk with size. The program never holds more short futures than we hold cash treasuries therefore we ensure we do not have upside risk. However, we may trade in and out of our positions and add various options methodologies in an effort to generate capital appreciation and alpha.