Hedge Fund
Alternative Investment Managers Strategy Overview
Private Strategies Via Publicly-Traded Companies
Overview
The Alternative Investment Managers Strategy invests in stocks of specialty finance companies focused on alternative and private investments. This strategy aims to provide investors with high income and potential for growth by investing in three main areas:
- Business Development Companies (BDCs): Private credit companies that primarily lend to middle market companies being owned by private equity firms
- Mortgage Real Estate Investment Trusts (mREITs): In the commercial sector, these REITs lend to acquirers in real estate private equity deals. Residential mortgage REITs manage mortgage-backed security portfolios that are similar to hedge funds.
- Alternative Asset Managers: These companies manage partnerships of institutional capital that invest in private equity, real estate, hedge funds and other alternative strategies.
Why This Strategy?
- High income potential with upside: BDCs and mREITs pay substantial dividends while asset managers offer the potential for capital appreciation.
- Rise of private investments: Institutional investors and family offices have been increasing their allocation to alternative investments for over a decade, a trend that is expected to continue.
- Banks are pulling back: Private credit is gaining market share as regulation stemming from the 2008 financial crisis and 2023 bank failures have limited banks’ ability to make riskier loans.
- Diversification: This strategy is similar to small cap value equity funds but offers greater income and lower correlation to the index. It also has similarities to high yield corporate bond funds but with a higher expected rate of return and higher risk.
Portfolio Construction
- The strategy targets a low double-digit annual rate of return
- The baseline sector allocation is 33% in BDCs, 33% in mREITs, and 33% in asset management firms. The manager will over- or under-weight sectors based on top-down and bottoms-up analysis.
- Individual stocks are selected based on fundamental research with a preference for reasonable valuations and limited downside risk.
Risk Management
- The strategy involves investing in smaller, specialized finance companies, which can be more volatile than large, well-known stocks
- The manager seeks to moderate the volatility of the portfolio with a quantitative approach that identifies unintended risks and prioritizes the effect of research-driven stock selection.
About the Manager
Joe McCallum founded Nearby Cactus in 2024. He was previously an analyst at Steel Canyon Capital, an Arizona-based concentrated value hedge fund focused on US equities and distressed debt. Prior to that, he worked as an analyst covering small and mid cap equities at Keeley Asset Management, a private equity associate at American Capital and an investment banking analyst at Citigroup and Wachovia. He has an MBA from the Applied Securities Analysis Program at the University of Wisconsin-Madison and BS in finance from Arizona State University.