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January 09, 2019  

Quant Pioneer Offers Clients Loss-Protection

Welton Investment, which has employed quantitative analysis for 30 years, is marketing a multi-strategy vehicle with investor-friendly fee terms.

The offering, Welton Paragon, invests in some 4,000 securities around the globe, including stocks, bonds, currencies and commodity futures. The strategy has performed well since launching in mid-November, including a nearly 10% gain in December — a month when most hedge funds stumbled.

Welton Paragon doesn’t collect a conventional management fee, though in down years investors contribute 1% of their assets to help cover expenses. As for a performance fee, Paragon keeps 25% of investor profits over an 8% hurdle. But the manager promises to hold all of that revenue in a reserve account to protect clients against any future losses.

A small but growing number of hedge fund firms are forgoing management fees and relying exclusively on performance-fee revenue in an attempt to better align their interests with those of investors. But only a handful of funds carry provisions allowing limited partners to claw back performance fees paid in profitable years to make up for losses in subsequent years.

Welton first launched its Paragon program in 2017 at the request of three investors, offering them more-leveraged exposure to key components of the flagship Welton Global program. But the original Paragon vehicle suffered sharp losses last year, prompting the manager to alter course in November by weeding out long directional bets. The Carmel, Calif., firm is now offering the revamped program to other investors, drawing early interest from university endowments, foundations and a pension plan.

Welton Global, which accounts for more than half of the firm’s $960 million of assets under management, also staged a performance turnaround late in the year. The flagship vehicle was down 11% year-to-date at the end of November, then gained 8.9% in December.

Welton also runs a managed-futures program called Welton Trend and a statistical-arbitrage vehicle called Welton Nexus — both of which gained about 1% in 2018.

Welton manages its trading programs using a proprietary research model dubbed MultiQuantSM, which encompasses a range of techniques including short-term trading, trend-following, momentum, statistical arbitrage, spread trading and relative-value analysis. The firm’s assets under management rose from $466 million at yearend 2014 to just over $1 billion at yearend 2017, before dipping over the last 12 months.

Welton is led by Patrick Welton, who founded the business in 1988 following a career as a medical researcher. The firm runs the bulk of its assets in separate accounts, rather than commingled funds.