Aspect Capital

Staying focused in a competitive world

Stuart Fieldhouse

Anthony Todd’s avowed ambition as CEO of Aspect Capital is, and has always been, to build a first-rank hedge fund business. In the two years since he was first interviewed by The Hedge Fund Journal (January 2005 issue), he has taken some big strides in making his firm one of the premier outfits of its kind on the European stage. But this required its founders to take a long and hard look at the business and their original strategic plan, with a view to setting out a roadmap for the next decade of the company’s development, and clearly map out, both for their own benefit and for their clients’, where Aspect was going to travel over the next decade, what it was going to set out to achieve, and how. Todd views this as an essential process in ensuring his company stays competitive in an industry that is distinguished by its competitiveness.

Going into 2005, Todd was not happy with the performance numbers his fund was generating.

“We were disappointed with the performance across our product range during the course of 2004,” he says. “We made a number of very important changes to our research program as a result. Performance is absolutely essential to everything we do. It was completely clear to us that we were not going to be able to build a successful long-term business based upon the kind of performance we were generating in 2004. We had to make some important changes to our approach.”

Another major decision was to re-organise research, away from a silo-based approach with separate, individual teams working relatively independently of each other to a much more open-architecture arrangement. Todd’s driving goal throughout much of 2004 was to find a means to improve research productivity, which he saw as critical to the ongoing success of the business. He believed effective communication between the teams would improve Aspect’s research mechanisms, and also wanted to be able to rotate researchers between his teams in order to expand their knowledge base. On top of this, he wanted to see his research teams supported by a range of common functions: for example, product management, IT, sales and distribution, etc. The aim was to free up the researchers to focus on research, and to avoid duplication of effort.

In-house, proprietary research is viewed as critical for the success of the Aspect business model. “The impact on our research productivity was almost instantaneous,” Todd says. “What we have seen over the course of the last two years is a complete sea change in the level of research productivity we’re achieving within the business – with the same number of people.” Of 105 personnel, 67 are employed in what could be described as the alpha generation part of the business. It represents an extremely heavy investment in R&D, and proportionally one of the largest in the industry compared with firms of a similar asset base.

Evolve or die
The philosophy behind the Aspect business is that markets evolve – they are subtly but importantly different than they were five years ago. The hedge fund marketplace itself is incredibly competitive. The firm believes it can stretch its position within the market via a driven research agenda, by organising its researchers so that they can generate more finished projects at the end of the month than previously, and can implement more refinements to Aspect’s programs. Todd has seen those refinements translate themselves into improved performance over 2005 and 2006. “That is the result of a very conscious set of steps we took during the course of 2004,” he explains.

Continual refinement across the programs is essential, in Todd’s view, hence Aspect’s heavy investment in R&D. Markets do not stand still. Indeed, their evolutionary cycle is getting shorted all the time. To stay on top of this, more frequent refinements to trading programs will be required, ergo more resources ploughed into R&D. “The less you invest in research and development, the more likely you will lose your edge in this competitive marketplace,” Todd says.

R&D is focused into two main areas, what Todd labels ‘research frameworks’ namely managed futures and equities. The firm’s diversified managed futures fund, was up 12% in 2005, and YTD up 7%. It is Aspect’s largest single program in terms of assets under management, with $3.1bn. However, Aspect’s equity programs are now managing over $500m. The success of this side of the business has helped it to increase its asset base. The firm’s European equity program is up nearly 9% YTD, with the Japanese strategy up nearly 15%. Both follow a market neutral approach.

“What’s been interesting is that the demand has been coming primarily from an institutional client base,” Todd says. “It is one of the most interesting shifts we have seen over the last couple of years, which partly reflects some of the underlying dynamics in the hedge fund sector, but also partly reflects our approach, namely to meet the requirements of high end investors.”

Aspect’s client list includes central banks, government agencies, pension funds, and insurance companies. Institutional money currently represents half Aspect’s asset management base, which constitutes a significant shift away from funds of hedge funds, the bread and butter of its early years of development in the late 1990s. Institutional investors are becoming more confident about investing directly with alternative investments firms, and they are choosing those like Aspect, specifically designed to meet their requirements from the start. Todd expects this trend will continue, even though the funds of funds sector overall is still growing. Says Todd: “If you look at  the hedge funds marketplace, the fact of the matter is that by number, the vast majority are boutiques. If you are a high level pension fund looking to invest a significant amount of assets, you have a fiduciary responsibility to your clients. I think it is very difficult for institutions to gain the level of comfort they want by investing with a small boutique with limited levels of corporate governance, limited levels of infrastructure, limited levels of research and development. What you’re seeing now in the hedge fund field is investments graduating increasingly towards that top tier of manager who have made that investment in research and development.”

Staying on target
One of the great dangers within the systematic investment field is that underperformance might prompt a manager to fundamentally change their investment approach. This is a major risk in this space, as it stops a manager from being truly systematic. They effectively become a discretionary manager. Aspect capitalises on the aggregate behaviour of market participants, something embraced by all its programs. The important factor is that Aspect did not wipe the board clean, despite the poor numbers achieved in 2004. It reorganised its research teams, it continued to refine its programs, but it was not panicked into introducing radical changes in its trading methodology.

A good example of the sort of fundamental changes Aspect and its competitors have exploited is the increasing application of direct market access technology. That has presented Aspect with a significant opportunity in the way it executes its trades, making it possible to reduce its visibility in the marketplace, as well as cutting its transaction costs. At the end of 2004 it set up a distinct trading research & technology team of six people within its trading room. It was a significant investment for the firm, but Todd believes it has paid off, contributing to the underlying performance in a big way.

“Within any area of the business, we’re always going to be open to trying to find the technology that can help us to achieve our goals,” Todd says. “In the area of electronic trading and execution we looked across the universe to try to find a provider that could actually meet our requirements, but we weren’t able to. We decided to build our own infrastructure internally. On the risk management side we did exactly the same thing. I think we’re extremely demanding in what we’re looking for.”

Effective use of technology has been central to the ongoing success of Aspect’s formula. Michael Adam, Gavin Ferris, and Martin Lueck have made their mark as in the ongoing development of the firm’s strategy in this respect, and can demonstrate a cutting edge awareness of technology and programs that other funds in this space will be envious of. Driving the research process are people who can combine deep market insight with an understanding of technology, and how it can be successfully applied to trade the financial markets.

Amongst the key appointments Aspect has made over the last two years is James Walker, the firm’s new CFO, who has taken overall responsibility for finance, compliance, legal, and HR within the company. Another is John Wareham, who was appointed to Aspect’s board in April this year as the new chief commercial officer responsible for client relationships. Wareham was previously Head of Foreign Exchange at AIG Financial Products. He oversees the sales and client-servicing functions, as well as the product management team. He has been tasked with advancing the way Aspect handles its increasingly institutional client base.

“Given [the product management team] is dominated by research quality, research calibre people, who do not have specific research responsibilities, it allows us to provide a research quality interface to our clients without our dedicated teams having to stop what they’re doing,” says Wareham.

Keeping institutional clients abreast of what is happening in a systematic business like Aspect is one of the big challenges Wareham has to handle in his new role. “We take seriously our obligation to be transparent with our clients,” he says. “However, transparency has its limits. We’re not going to take someone in to see the source code, and arm them with a photocopier, but we recognise that some of the world’s largest blue chip organisations that have decided to go self-directed in their alternative investment activities are going to be perfectly sophisticated enough to want to get into the heart of the engine, and we help them to do that.”

Aspect uses a multi-tiered approach to keep clients abreast of what it is doing: apart from written communication investors also have a sales relationship with a member of Wareham’s team who can provide an introduction to a member of the product management team when it is required, and at some point it is to be expected that senior clients will want to spend time with the Aspect principals.

“That’s where the high level research and other conversations would naturally take place. Aligning everybody’s diaries around that multi-stage process is a large part of what we do; ensuring that major clients do spend time here is important,” Wareham explains. “Yes, we’re happy to fly around the world, but major clients are going to develop a much better sense of the place by being here, than by having people on video or telephone conferences constantly.”

Europe remains the most important geographical component of Aspect’s client base, accounting for more than 50% of its assets under management. In contrast with its asset management priorities, Aspect is working hard to diversify its client base out of the European fund of funds space, to reflect a more geographically diverse customer composition (e.g. its ongoing distribution relationship with Gartmore in Japan).

“What struck me when I arrived, is that here we have an organisation with phenomenal provenance, and tremendously articulate founders,” Wareham observes. “There should not be a limit to the size of the investors upon whom Aspect is prepared to focus its strategic marketing efforts. We should be focusing on the significant allocators.”

A fertile Crescent
Anthony Todd’s emphasis on technology is no idle boast, and this was demonstrated in November with the acquisition of the intellectual property of Crescent Technology. Co-founded in 2003 by Gavin Ferris, the chief architect at Aspect, Crescent had been developing quantitative trading systems and techniques. Ferris himself joined Aspect in January, and was named to the board of directors in May. Aspect made the decision to acquire Crescent based on the latter’s proprietary technology, and its likely applications within the Aspect range of programs. It was thought that Crescent’s intellectual expertise would help to advance Aspect’s research agenda, and the plan is to rapidly deploy the firm’s trading techniques. Ferris is already working closely with Aspect CIO Michael Adam.

Aspect has also acquired the contract to manage the AdAstra Diversified Fund, a managed futures vehicle to which Crescent had licensed several trading technologies. The fund has been re-named AdAstra Aspect Diversified as a consequence. Todd views the acquisition as a major competitive advantage, and a significant boost to Aspect’s research capability. “[Ferris] is one of the most senior additions to the company’s research team we have made in our history,” he says. “He is one of the world’s leading quantitative technologists.”

Ferris’ background is in the telecommunications field, where he worked in developing 3G mobile communications and digital radio. Many of the challenges he consulted on in the telecoms business also had applicability for the financial markets. With Adam and Martin Lueck he will be playing a role on the investment management committee, and helping to set the research agenda. It is a potent combination of brilliant minds that Todd thinks will stand Aspect in good stead going forwards.

New shareholder
In February 2006 AIG Financial Products Corp took a 4.3% stake in Aspect, in addition to making a $75m investment into a range of Aspect programmes. AIG-FP also retains the right to acquire an additional 8%, plus the ability to invest a further $125m in seed capital. AIG-FP was an ideal partner for Aspect to have, both as a shareholder and as an investor. AIG-FP’s parent is a globally-oriented investor with a $50bn investment portfolio, and is a specialist in the field of investment, corporate finance, and financial risk management.

The relationship between AIG-FP and Aspect goes back a number of years. The two firms have worked together on structured products solutions, and AIG-FP has acted as Aspect’s FX prime broker. The acquisition by AIG-FP of Aspect stock was the crystallisation of the relationship, cementing an alliance with a powerful, well-connected organisation that is bound to benefit Aspect’s ongoing development.

Major shareholders are yet another bonus when it comes to marketing Aspect in the institutional space. The firm also boasts Man Group PLC as a 23% shareholder. “We’ve retained our complete autonomy: there’s no involvement by either Man or AIG-FP in the daily running of the business or the execution of our research strategy,” Todd says. “What it does do is provide an extremely strong platform for the future development of the business. Talking to clients anywhere in the world now, we can point to the world’s largest hedge fund company, and part of the world’s largest insurance company, as shareholders. It puts us in a very strong position.”

Conclusion
These changes ought to be viewed in light of the rationale behind the foundation of Aspect back in 1997, when the founders left ED&F Man to set up a hedge fund business that they felt would be able to capitalise on the increased participation of institutions in the hedge funds business. They knew institutional investors would demand performance, a high level of client service and transparency, capacity and strong corporate governance, compliance, management structure, indeed resilience throughout the entire business. The board appointments in May were central to that long-term view.

Todd feels a focused approach is important to Aspect’s ongoing success, sticking to what it does best. Although future product launches are on the design table, he emphasises that Aspect is not going to diversify into new areas of investment. He does not want to see it becoming a large, ‘man for all seasons’ type of house. “With [diversification] comes the risk of loss of focus,” he says. “This is why the focus for us over the last two years has been on managed futures, and global equity market neutral…What we’re not looking to do is to launch a range of 10-20 different programs. That would be completely inconsistent with our approach. What we have to be aware of is where our positional advantage is, where we can compete effectively, we have to be highly focused in what we do.”

With the current research agenda and capabilities (or something along these lines), and the nature of the deep and extremely liquid markets it trades, Todd is confident that the firm can continue to create more capacity for its investors. Over the next three years, he can anticipate its asset base rising to $10bn from the current figure of $4bn, and is confident he can do so without compromising performance. “I think we’re quite unusual in that we do have a long-term strategy,” he says. “We are looking to continue to build the business over the next 10 years, we actually have a 10-year plan for the company. We have spent a lot of time and thought, as a board, focusing on our strategy. What are we doing right? What areas can we improve? What’s happening in the marketplace? The steps we’ve taken, the significant changes we’ve made…have left the company in a far, far stronger position than it was two years ago.”