DSAM Kauthar Natural Resources Fund: Zweig-DiMenna International Managers

DSAM Kauthor Natural Resources Fund is one in a family of Shariah compliant commodity related funds offered by Dubai Shariah Asset Management (DSAM) on the Al Safi Trust Platform. Dubai Multi Commodities Centre (DMCC) has invested $50 million seed capital into the fund.

The DSAM Kauthor Natural Resources Fund, the third fund operating on the Al Safi platform, offers investors exposure to the natural resources sector. The fund invests exclusively in units of the Zweig-DiMenna Natural Resources Fund, a sub-trust of the Al Safi Trust managed by Zweig-DiMenna International Managers. Zweig-DiMenna, with assets of around $4 billion, is one of the oldest names in the hedge fund industry.

Joseph DiMenna and Martin Zweig co-founded Zweig-DiMenna Partners in 1984. In 1987 they started Zweig-DiMenna International, an offshore fund. Zweig and DiMenna are seen as pioneers in long/short equity investing.

DiMenna is the hands-on head portfolio manager for the company’s investment vehicles. He has a 25-year track record in long/short equity investing. Throughout his career he has actively invested across the spectrum of natural resources stocks, an area of special interest and expertise.

Zweig-DiMenna launched its first natural resources sector-focused long/short equity vehicle in 2005. As head portfolio manager for the Zweig-DiMenna Natural Resources Fund, DiMenna is responsible for portfolio construction and oversees stock selection.

 Zweig’s 40-plus-year career has been spent developing and refining market risk analytics. Thomas Keyes is also portfolio manager for the Zweig-DiMenna Natural Resources Fund. He joined the company in 2001 and is also responsible for portfolio construction and research for all the Zweig-DiMenna investment vehicles. His oversight and research in the Zweig-DiMenna Natural Resources Fund spans a wide variety of natural resources stocks.

Another key member of the investment team is Daniel Altman, a metals and mining research specialist who joined Zweig-DiMenna in 2007. He has received a number of accolades for his research in the sector.

Other investment professionals on the investment team have an average of over 15 years working in the hedge fund industry.

Zweig-DiMenna emphasises research, trading, risk management and client service. The company takes a long-term view of client relationships. Many of its investors have been with the company for over 10 years. Its investor base is wide including various institutions, family offices and funds of funds.

Throughout Zweig-DiMenna’s history, the focus of the company has always been on returns rather than asset growth.

Diversified portfolio
The DSAM Kauthar Natural Resources Fund’s return reflects the performance of the Zweig-DiMenna Natural Resources Fund. The portfolio is diversified holding at least 75 different positions of US and global stocks across various natural resources sub-sectors and across a range of market capitalisation.

The Zweig-DiMenna Natural Resources Fund invests in the securities of companies that own or develop natural resources or energy alternatives as well as companies that supply goods and services to the sector. These include companies involved directly or indirectly in exploring, mining, refining, processing, transporting, fabricating, dealing in, or owning natural resources.

Zweig-DiMenna is known as a manager with extensive investing experience in natural resources stocks, using a rigorous, catalyst-driven research approach to stock selection. Fundamental research from a global opportunistic perspective is at the heart of the company’s success.

The portfolio is constructed from the bottom up and decision-making is centralised. Ideas come from both the portfolio managers and the analysts. The team looks at a broad universe of stocks, and makes its selections based on in-depth research.

Modelling stocks
Zweig-DiMenna’s research approach includes constructing detailed financial models of stocks in the energy, basic materials and related sectors. Investment professionals meet with the management of the companies and visit facilities worldwide. Analysts also meet with competitors, vendors and end-users in the course of their research on a company.

Detailed analysis of supply-and-demand trends in natural resources in developed and emerging markets is another element of its expertise in the sector. In addition, the team uses cutting-edge technology to assist the research process.

The research team concentrates on identifying specific catalysts for change in a stock price, including earnings surprises, product cycle changes, technological innovation and regulatory changes. Shifts in supply and demand, driven by changing industrial and economic conditions, are an important factor in the investment decisions. Changes in commodity price expectations are another important consideration. Other factors include restructuring and corporate events, as well as more esoteric concepts, like changes in investor psychology. 

On the short side, the investment team looks for companies where there are fundamentally flawed business models, poor earnings quality, the inability to generate sufficient cash flow, aggressive accounting, and mis-pricing based on assumptions about the underlying commodity prices. The portfolio always includes short positions, which are seen as profit centres.

 Catalysts for change are monitored continuously. Earnings and price targets are identified and frequently revised. The time horizon on stocks is typically six to 12 months. The average individual stock position size is in the 1%–2% range and there are generally only a few over 4%. The portfolio is diversified across a substantial number of individual positions for portfolio flexibility.

Exposure in Zweig-DiMenna’s natural resources sector strategy has averaged about 75% net long and 95% gross long in recent years, but currently is much lower. The gross and net investment exposures vary, driven by a combination of opportunities and market conditions.

Risk management is important to Zweig-DiMenna. The company takes a two-pronged approach. First, the company has a risk manager who provides the portfolio managers with analyses including gross, net and beta portfolio exposures, as well as the concentration, correlation and beta of sector exposures.

The beta of the individual positions is also carefully monitored, as is the liquidity of the positions. Positions are evaluated on an ongoing risk/reward basis and the viability of the catalysts that have been identified is carefully scrutinised.

Geographic exposures are also carefully monitored. A variety of other risk management tools are used including BARRA analysis.

Second, macro-economic risk management focuses on interest rate trends, inflation, investor liquidity, global supply and demand, geo-political risks and industry and market trends.

FUNDAMENTALS OF DSAM KAUTHAR NATURAL RESOURCES FUND

Name of fund: DSAM Kauthar Natural Resources Fund
Management company: Zweig-DiMenna International Managers
Portfolio managers: Joseph DiMenna and Thomas Keyes
Contact: Mohammad Jamjoum, general manager, Dubai Shariah Asset Management, Dubai Multi Commodities Centre, Al Mas Tower, 50th Floor, Jumeirah Lakes Towers, Dubai, United Arab Emirates ([phone]; [e-mail])
Domicile: Cayman Islands
Asset manager: Dubai Shariah Asset Management (DSAM)
Fund summary: Invests exclusively in units of the Zweig-DiMenna Natural Resources Fund, a sub-trust of the Al Safi Trust Platform and is managed by Zweig-DiMenna International Managers. The fund’s return reflects the performance of the Zweig-DiMenna Natural Resources Fund account at Barclays Capital. It invests primarily in long/short equity securities with stock selection based on a fundamental bottom-up analysis. The portfolio is generally diversified with at least 75 different stock positions and includes US and foreign stocks of natural resources sub-sectors with a range of market cap. The fund may invest in the securities of companies principally engaged in owning or developing natural resources (or their alternatives), or supplying goods and services to these companies, including entities involved directly or through subsidiaries in exploring, mining, refining, processing, transporting, fabricating, dealing in or owning natural resources.
Asset manager fee:    1%