Bleecker: Allocating risk smartly

November 30, 2010 06:00 PM

The trip from being a Ukrainian electrical engineering student to owner and principal of Bleecker Street Capital was a long one for Dmitri Smolansky, but a passion for math and a love of poker pointed the way.

Smolansky had already completed three-and-a-half years toward a degree in electrical engineering from the Kiev Technical Institute before he immigrated to the United States with his family in 1991. Once here, he went back to school and earned a degree in statistics from the University of Illinois at Chicago.

imageSo armed, he went to work building actuary models in the insurance industry, though the choice of profession was born from logic, not passion. "I studied statistics and actuarial signs were kind of in vogue for the time. It was the logical place for a statistics student to work, so that’s where I went," he says.

It was a good training ground for Smolansky, whose trading approach revolves around maximizing return per unit of risk.

It wasn’t long, though, before he was looking for something a bit more exciting. "I’m a poker and chess player. There are a lot of similarities between poker and investment management," he says. "There is the feeling that you can never learn everything that there is to know, and that even the smartest people are often wrong."

This led him to pursue his MBA, which he earned from the New York University Sterns School of Business in 1998. Thus prepared, he was hired on at General Motors (GM) to work on their Global Tactical Allocation plan. This experience laid much of the foundation for what Smolansky would do with Bleecker.

Smolansky started with GM as an analyst and eventually become a portfolio manager in 2001, which made him responsible for both GM’s internal portfolios and allocating money to outside managers. That access to traders outside of GM helped develop his trading strategy. "Because GM was a very large client of many investment firms, I had the luxury of discussing a lot of research and management issues with the brightest people in the investment management business," he says. "Since I was the head of the group, I spoke with their research analyst guys about global macro business."

Smolansky left GM in 2005 and spent time as a portfolio manager at Tribeca Global Management and managed the Smolansky Fund Limited managed account that was sponsored by Plinthos LLC as part of Man Founders Incubation program.

Smolansky says a big influence for his trading philosophy was Tom Hazuka, who managed a program for Mellon Capital Management. Among the things Hazuka taught him was the importance of economic theory. "He showed me that just because a theory does not work in a particular environment does not mean the theory is wrong. He was more into theory and less into short-term data mining," Smolansky says.

In May 2009, he became the principal and sole owner of Bleecker. The name? "Bleecker is a street in Greenwich Village, right next to NYU where I went to study. My first apartment with my wife was on Bleecker Street. I have very good memories of it," he says.

Smolansky uses a systematic global macro approach that takes into account fundamental and behavioral factors to make trading decisions. He uses fundamental factors to analyze market valuations to capture inefficiencies and differences in expected returns, and deploys behavioral factors aimed to exploit investors’ under-reaction or over-reaction to changes in economic variables.

"Behavioral factors are more short-term in nature and they compliment fundamental valuation factors very nicely in the sense that they are not correlated and they try to address deficiencies that valuation factors have," he says.

Smolansky trades equity index, bond and currency strategies that are independent of each other, though the equity index and bond strategies exploit relative value. The strategies will buy an undervalued market while selling a related overvalued market in a mean reversion play.

He trades the financial sectors because that is where his research has focused for the last 12 years and the economic drivers for their performance are more economic theory.

Smolansky started Bleecker with $5 million under management; within a month that number grew to $12 million. It is now over $39 million. Since inception, Bleecker is up an annualized 11.8% through October with a volatility of about 5%. The target is 12-15% annual return.

Smolansky hopes to grow in size and scope. "In five years I would love to be managing $1 billion and have a good team. Maybe adding one or two researchers" he says.

A love of strategy games like chess and poker made Smolansky look to trading. In both, knowing your opponent and allocating risk where it can earn the most on a risk-adjusted basis is key. By combining valuation factors with behavioral factors, Smolansky gets the biggest bang for his risk capital buck.

About the Author

Web Editor/Assistant Editor Michael McFarlin joined Futures in 2010, after graduating summa cum laude from Trinity International University, where he majored in English/Communication. With the launch of the new web platform, Michael serves as web editor for the site and will continue to work on the magazine, where he focuses on the Markets and Trading 101 features. He also served as a member of the Wisconsin National Guard from 2007 to 2010.