Stockholm (HedgeNordic) – After almost 20 years of equity market experience from three of the largest banks in the Nordics, Pontus Dackmo launched earlier this year a “Protean” hedge fund alongside now-former Didner & Gerge portfolio manager Carl Gustafsson. As the name suggests, Protean Select is a flexible and opportunistic long-biased equity fund “optimized for performance.”

“We have deliberately chosen to optimize for performance because we are managing our own money in this fund in addition to other investors’ capital,” says Dackmo. “We have optimized for maximum flexibility because both Carl and I have been long enough in the markets to know there isn’t just one way to make money,” he emphasizes. “It is tricky to succinctly present the fund in a style box. The overarching idea is that the strategy is adaptive.” Their flexible and adaptive approach helped Protean Select navigate the uncertain and turbulent market environment of the past few months, with the fund advancing 3.6 percent since launching in May.

“We have deliberately chosen to optimize for performance because we are managing our own money in this fund in addition to other investors’ capital.”

Flexible, Imaginary Buckets

Despite running the fund with a high degree of flexibility, the duo generally builds the portfolio around three imaginary building buckets – core quality names, “growthy” small- and mid-cap names, and opportunistic special situations – coupled with market hedges and single-stock shorts. “Schematically, we currently have about a third of the long book in large-cap quality names where we see a decent risk-reward,” says Dackmo.

Protean Select has a good chunk of its exposure in banks and insurance companies. “We believe banks are undervalued and have several structural benefits playing to their advantage,” he explains. Dackmo also describes the Nordic and Swedish insurance market as “heavily consolidated, very cash-flow generative and fairly non-cyclical.” Given the uncertainty dominating financial markets at the moment, Dackmo and Gustafsson plan on holding onto of their exposure to banks and insurance companies. “But that could change, we are not dogmatic about that,” emphasizes Dackmo.

The duo also plans to expand the allocation to small- and midcap names over time. “Given that we have a long background in this field and that I have been focused on small caps for a long time both as a sell-side analyst and portfolio manager, we know we’ve found attractive opportunities when we see them,” says Gustafsson. Protean Select can own both “growthy” names at attractive valuations and very cheap slower-growing companies. “Given that small and midcap growth names have been outperforming for many years, we anticipate we would be fishing in those waters.”

“We actively manage the net exposure of the strategy, which is a reflection of the risk level we want to run given the level of uncertainty in the market.”

The high degree of flexibility allows the duo to deviate from this imaginary building block composition but also to occasionally deviate from the initial plan of running a long-biased fund. Since launching in May this year, Protean Select has maintained a lower net exposure than the strategy’s expected long-term average of over 50 percent. “We actively manage the net exposure of the strategy, which is a reflection of the risk level we want to run given the level of uncertainty in the market,” explains Dackmo. “This is our sole vehicle for investing, and we rely on being able to change when the market changes (or preferably right before).”

Optimized for Performance

Having started with SEK 300 million under management back in May, Protean Select has seen its assets reach nearly SEK 450 million. Protean Select will be closed to new investors after hitting the SEK 2 billion milestone as the team wants to steer away from the asset-gathering model. “We set this strategy up to have maximum flexibility in our pursuit of optimizing for performance and we know there is a pretty clear correlation between size and lower performance,” explains Dackmo. “There is a number of opportunities in Scandinavia that you cannot play after reaching or surpassing a certain asset size. We have a dedicated style to optimize returns that requires a broad set of opportunities.”