DCM Systematic: Hitting the Right Notes with a Fusion of Ideas

In 2008, Dr. Anthony Dearden was working at a large, multi-strategy hedge fund, when he interviewed Dr. Jerome Callut. Both had only recently graduated so there was plenty to discuss, including Dearden’s PhD in Robotics and Callut’s PhD in Machine Learning, the state of the financial markets given the rather gloomy outlook at the time, and all the other obvious topics covered during a first interview: Callut’s academic credentials, his experience, how he would fit within the team, and why he wanted to join the industry. However, the interview had a different focus, which started with the inclusion of playing in a jazz band on Callut’s resume. “I actually think we spent most of the first interview talking about who our favorite jazz guitarists are,” Dearden said, “Jerome is very much a fan of John Scofield, and I am more a fan of Bill Frisell, so there was a little bit of tension early on, but we managed to resolve it.” Jerome remembers it slightly differently, “I definitely dig Scofield but most of all, I’m a fan of Jimi Hendrix.”

Dearden and Callut worked together successfully for a few years before deciding to leave and start their own firm, DCM Systematic Advisors SA (“DCM Systematic”). The partners then had to face the hurdles of building the investment strategy (called DCM Diversified Alpha), navigating the variety of regulatory and bureaucratic challenges, as well as securing seed capital. It was at this point in the journey that Gaetan Maraite joined as an equal partner to lead the non-investment functions, adding his experience of building and managing relationships. The trio were able to get DCM Systematic up and running and the firm grew in AUM and in headcount. Callut expressed the importance of adding the right people to the team, “If we are in a band of four, for example, and we are in the zone, it’s like we are five because there is something pulling it higher than we can access on our own.”

Initially the hires came from within their own networks – Dr. Stephane Bonneau as Senior Quant Researcher, who they’d worked with before, and William Swift as Head of Business Development, who had covered the team while in previous capital introduction roles – and now they have added outside talent tapping into engineering and scientific communities of Switzerland, where DCM Systematic is headquartered, and Belgium, where Callut and Maraite hail from.

“If we are in a band of four, for example, and we are in the zone, it’s like we are five because there is something pulling it higher than we can access on our own.”

Dr. Jerome Callut

DCM Systematic relies on a team approach rather than leaning on just one individual to produce on behalf of the entire firm. DCM Systematic does not look for any individual with radical views, but instead for people who have an open-mind and can respond to one another’s ideas. “My favorite bands are all about the whole band,” Dearden says, “It’s not just about having one person be the star, or a crazy guitarist getting all the attention. We need the whole package working in unison.”

Dearden describes his working relationship with Callut as complementary to each other in many ways, but notes that more importantly, they both gravitate towards the same way of thinking, which leaves no guessing of each other’s work or motivations. The team was built with that same principle in mind: hire people who understand and respect how each other works. Dearden appreciates an individual’s inventiveness and willingness to professionally criticize or question, which are two key aspects to how DCM Systematic has grown and succeeded. Callut says, “When you are in a band, you have to listen to others more than yourself. That is also something we think about a lot internally; we really try to understand where someone is heading, and we support them on that journey.”

When they started in 2016, DCM Systematic wanted to explore as many opportunities as possible in liquid futures and capture them with a quantitative, multi-strategy approach. The plan was that this would help differentiate themselves from trend-following CTAs and other more traditional risk premia as well as deliver a more stable return stream. A lot of this still remains but DCM Diversified Alpha has focused its approach and evolved to explicitly avoid trend-following. Currently it consists of between 20-30 complementary strategies with three styles: behavioral, relative value, and macro. Their approach aims to benefit from anticipating predictable players and take advantage of their nimble size when implementing trading ideas.

“It’s not just about having one person be the star, or a crazy guitarist getting all the attention. We need the whole package working in unison.”

Dr. Anthony Dearden

The aim is to continually enhance and improve the DCM Diversified Alpha offering and research is at the core of the business. Callut illustrates the importance of this mindset, “We are never going to be at the destination because there is always something new to learn, something to share, or explore. We don’t want to wait on the next challenge.”

DCM Systematic views risk as a two-sided matter and the team emphasizes that their approach to risk management is a key part of the investment process. Firstly, they acknowledge the operational risk of software development, coding, and cybersecurity. For this, they employ pre-existing tried and tested methodologies of unit tests and validation with oversight from a dedicated CTO who joined the team a year ago. The other side of risk management is investment focused and is concerned with protecting alpha; an element just as important as generating it. Dearden’s and Callut’s experience at their former firm has helped them develop their own view of managing risk in terms of considering possible scenarios that might negatively impact the strategies, and factoring those into the risk system. Callut explains, “That is related to my background in convex optimization, which I focused a lot on during my studies, and has been a focus of a lot of our energy since early in the process. It requires a different approach to a standard trend-follower, and we designed the methodology specifically for our multi-strategy approach.” 

Similar to Jazz adapting from and developing out of Blues music, Dearden and Callut’s strategy and approach developed from their experience at their previous hedge fund. They, along with many of their competitors, have a background in some variation of trend following trading, though now, DCM Diversified Alpha employs a strategy distinct from that. With respect to DCM Diversified Alpha’s performance, Dearden notes, “It feels good when we’re doing things differently and we’re differentiating ourselves from everyone else, but you can get times like last year [2022] when the standard off-the-shelf trend following algorithm is giving out 40% returns. We feel like we are underperforming because we are up 10%. So it’s a challenging proposition to be different.”

Callut explains the importance of not solely focusing on pure numbers and results to measure DCM Systematic’s success. DCM Systematic’s principals are confident in their track record and believe their strategy will continue to produce results, but they seek to create and cultivate long-term relationships with their investors by helping them understand the story behind DCM Diversified Alpha and what role it can play in their portfolio. This dynamic seeks to avoid an investor running away after a drawdown by trusting the team’s ability to find alpha that other managers may not.

When you are in a band, you have to listen to others more than yourself. That is also something we think about a lot internally; we really try to understand where someone is heading, and we support them on that journey.”

Dr. Jerome Callut

DCM Systematic is a systematic trader at its core, but the team’s ideas come from observing different markets’ reactions to specific events and behaviors, which is then built into their models to create a repeatable process. “These are all human concepts,” Dearden explains, “but the systematic process is a tool we use to encode them, automate them, and scale them up.”

DCM Diversified Alpha’s trading leans on its principals’ educational backgrounds in Robotics and Machine Learning with a robust systematic process developed on precise coding and mathematics. Dearden describes DCM Systematic’s trading process as a “systemized discretionary process.” A balance exists between the technical requirements of systematic trading, and the inventiveness of the discretionary process, very similar to the creation of Jazz, which requires adherence to the rhythm and notes associated with Jazz theory, and at the same time allows for inventiveness from those who have mastered the art. When developing a strategy, theory exists in the mechanical side of things, like research and developing the quantitative process. This provides the framework in which the team can explore new ideas and turn them into innovative strategies. Dearden best explains the inclusion of inventiveness within DCM Systematic by discussing the mechanical work and then “adding creativity and finding inspiration, otherwise we don’t get the breakthroughs, otherwise we don’t get the enjoyment from it as well.”

At its beginning, Jazz was an avant-garde style of music with no real definition as it was based on a musician’s willingness to improvise chords. Now, like any new art form that gained popularity, theory has developed around Jazz, which helps define the terms, core concepts and principles in more tangible ways. DCM Systematic was built on experience and education in machine learning and mathematics, which has helped the team establish a foundation much more structured than that of Jazz. However, the team’s knowledge of the industry and their continued experience in the markets has created an expertise in their strategy that balances the technical skills of systematic trading and inventiveness of discretionary ideas.

Disclaimer: This article does not constitute an opinion by New Hyde Park Alternative Funds, LLC, or any of its principals. The content illustrates the methodology of DCM Systematic Advisors, trading strategy and investment philosophy and is presented for informational purposes only. Past performance is not indicative of future performance. 3375-NHPAF-03142023.