“You start with a list of don’ts before you ever get to the do’s,” says Lev Margolin, portfolio manager and founder of Melbourne-based absolute-return global equities manager System Capital. “Our process uncovers these structural ideas, and then we work through a whole framework to find the essence of that idea, which is the structural decline.”
Margolin’s long-short strategy has been built around this fundamental insight: structural change in industries is accelerating, not slowing, and it is giving rise to both long-term compounders and short-term dislocations. System Capital seeks to capture both sides of that equation by identifying businesses strengthening their ecosystem position, while shorting those in decline.
“The traditional idea of shorting was about reducing exposure to market or sector risk,” he explains. “But what we are doing is very different. We are looking for situations where a predictable business experiences a permanent change to its competitive intensity or its industry structure, and the economics don’t recover.”
This framework has driven both sides of the book. Long positions are underwritten with private equity-style discipline: predictable, cash-flowing franchises with non-discretionary revenues and strong customer lock-in. The goal is to earn a minimum of 14 per cent a year over five years, while handing the next investor a stronger business than the one originally purchased.
“We only invest where we can demonstrate the business increases its structural strength with each member of its ecosystem,” Margolin says. “That means stronger bargaining with suppliers, a stable regulatory regime, a better social licence, and more value delivered to the customer.”
Shorts, by contrast, are predicated on breakdowns in that ecosystem. Traditional TV and advertising agencies serve as live case studies. “Free-to-air television lost a little audience for years, but the real damage started when the streamers had reach and digital ad inventory,” he says. “Now they are accelerating decline, and the agencies are being hit by AI on the creative side too. This is the second phase of disruption.”
What matters in each case is visibility. “We won’t invest in a business where the pricing model is so uncertain that the last few users can still be covering the whole cost base,” he says. “Or where the unit economics aren’t clear. That’s not underwritable.”
That philosophy extends to recent market themes, including AI. Despite its dominance across indexes in the last year, Margolin has remained underweight. “We just haven’t had the visibility on whether the structural strength is durable enough to underwrite over five years,” he says. “But somehow that’s still worked for us. That’s the risk of our strategy, if we miss a wave like that, we have to find durable advantage somewhere else.”
Performance has been strong since inception in October 2022. The fund has captured the majority of market upside while limiting downside. Looking at the numbers, the fund drawdown ratio of 60 per cent indicates it has protected 40 per cent of capital during market declines while outperforming the MSCI World Index on a net exposure-adjusted basis.
System’s risk lens is explicit. “You want to be compensated for the duration of your view,” Margolin says. “That’s the problem with the way many low net long-short funds are constructed. They are built for quarterly earnings beats, not structural change.”
He describes Tradeweb Markets Inc. as a model long. “Its asset swap and interest rate swap (IRS) strategy enabled market share in swaps to grow from 14 per cent in 2022 to nearly 22 per cent in 2025,” he notes. “Its investments in portfolio trading made it the leader, and that added over US$180 million ($273 million) in revenue. That’s a strengthening business.”
System Capital applies stress tests based on real market events like the GFC or the 1991 recession, not hypothetical scenarios. “We flex the structure for something that actually happened,” Margolin says. “If things stay normal, you get the statistical outcome. If there’s a real stress event, that’s already embedded in the credit profile.”
Much of the strategy’s edge comes from understanding where investor behaviour gets it wrong. “Money has been flowing to styles that can’t take advantage of duration,” he says. “That gives us an opportunity to back longer-dated transformations while shorting outdated franchises that no longer work.”
At the heart of it all is a singular belief: “Understanding a business’ strength relative to its ecosystem is crucial to performance over time,” Margolin says. “If you can’t explain how the structural position is getting stronger, or weaker, you shouldn’t own it.”