How to make the big calls: the Alceon way of investing in equities

Australian Financial Review 

Jemima Whyte – Senior reporter

Feb 15, 2021

Daniel Chersky and partner Adam Ritter positioned themselves in early 2020 for a big fall in equities, at a time when global markets looked as though they were just going to keep rising.

Ukrainian-born Daniel Chersky has made some big calls during financial extremes. In the throes of the dotcom boom, he decided he didn’t want to be an accountant. During the depths of the GFC, he joined alternative investment manager Alceon as its youngest equity partner and worked on his best deal to date. And as the pandemic spread last year, he quickly made the call it would hit markets hard.

“Markets went higher and higher in January and February [last year] and we decided this was an opportunity,” the 40-year-old says. “Through engaging with medical experts we knew we would all know if this was the real thing in a really short period of time … We knew the drawdown would be 30 per cent, not 5 per cent, and we could make 10 times if we were right.”

Chersky and partner Adam Ritter didn’t completely pull the trigger on their strategy until after the “fateful weekend in Italy” in late February 2020 when it was clear COVID-19 was no longer just a China problem. The fund had already put on some hedges through buying short-term put options in early February, which were far out of the money, and then had taken them off as markets kept rising. But after that weekend they reactivated the strategy: short-term put options were back on, Australian index futures were shorted and so were 10 individual stocks in the travel and medical spaces, including online travel agent Webjet and IVF clinic operator Virtus Health.

“We didn’t have a negative view on those stocks as such, it was [our view] on what was evident and going to happen at some point in time. We paired some long positions as well,” Chersky says.

The big call paid off. The Alceon Liquid Strategies fund had its best ever year in 2020, up 34 per cent, net of fees.

“That’s a function of two things,” he says. “We hedged very effectively so didn’t take a drawdown in Feb and March like the whole market – we readjusted and took those hedges and shorts off in time to participate in bounce back that has happened.”

For Chersky, it was further confirmation that the strategy he’d set up with Ritter in 2016 when they founded the Alceon Liquid Strategies fund, which manages $200 million on behalf of a tight-knit group of Alceon partners and investors, was the right one. Chersky describes the investment strategy as a “high-conviction, bottom-up strategy focusing on ASX small and mid caps”. Which it is, with lots of flexibility.

The fund’s four analysts typically choose 15 material positions, and then layer risk-management trades – options, short positions, other sorts of structuring. Chersky can hold positions in private companies and global markets, though he says both are rare and the latter are mainly for hedging. Chersky wants to make the point that while the fund adapted to abnormal market conditions early last year, it is core to its way of managing money. Risk management is always front of mind, and the fund has never had a down year.

“As a high-conviction manager, our focus is to make sure we protect the downside on things that can go wrong, and really back our winners, which drive alpha,” he says. “It comes down to position sizing. You are never going to get everything right. If you get two out of three calls right you are doing well.”

The idea is the fund – which Chersky now wants to grow, to up to $400 million under management – cherry picks Chersky’s experience in different parts of financial markets.

He started as an intern at KPMG straight out of school, and working as he studied. “That’s where I got first-hand experience of the dotcom boom. I saw some crazy stuff going on with these conservative accountants punting,” he says. But accounting wasn’t for Chersky, and after university he went to JPMorgan as a graduate, when Alceon principal Trevor Lowensohn was running investment banking.

“The world was burning”

Chersky followed Lowensohn to Babcock & Brown, where he stayed for just over two years. And then, just as the GFC hit, Lowensohn called up Chersky to ask if he’d be interested in working on a structured credit deal – Chersky’s first. The deal was to be the best Alceon, which now manages $2 billion on behalf of investors, has ever done, and the one in which the first seeds of the Alceon partnership were sown.

“They called me and said ‘do you want to work with us to raise capital?’ This was when, frankly, the world was burning. But we raised about $25 million, bought a mortgage book at 10 cents in the dollar, and ultimately got 100 cents in the dollar plus interest in a deal that kickstarted Alceon,” he says.

“I’d never done a credit deal … there was a lot of learning as we were going along, and I parlayed that experience into mortgage-backed securities in the following two or three years.”

As one of Alceon’s original and youngest partners, over the next few years Chersky was involved in more credit deals and increasingly in special-situation-style trades in companies including RAMS Home Loans and Crowe Horwarth.

But by 2016 he floated the idea of starting an equities fund. “To their credit, they backed me,” he says, noting Alceon partners account for about 20 per cent of funds he manages.

So how is the fund positioned now? Chersky says he expects markets will continue to be volatile, but so far it’s all looking like the recent run will continue.

Gradual normalisation 

“Going into 2021, I think the volatility is a permanent feature going forward,” he says. “There are three things we are watching – the effectiveness of vaccination programs, interest rates and stimulus and support.

“At this point all three factors point to gradual normalisation and earnings should rebound off the back of them.”

Among the fund’s high-conviction bets are ferry operator SeaLink and Uniti, which lays fibre in new developments and then charges internet providers access to the networks. The two picks have at least one element in common: they’ve recently completed major acquisitions, which Chersky says will significantly improve industry dynamics for both.

In the case of Uniti – which he notes Alceon knew as a business before it listed on the ASX – the small cap has just bought Opticomm.

“That’s a catalyst, a transformative acquisition that will change the market structure,” he says. “The market structure is now a duopoly with the NBN, which is a quasi-government entity that isn’t focused on greenfield.

“We think the merged group will double its market share. Returns on capital in this company, we’ve never seen anything like it.”