Aspect Capital, founded in 1997, is decidedly a member of the established group. It traces its roots all the way back to AHL, through its co-founder and director of research Martin Lueck who is the ‘L’ in the Man Group flagship. Anthony Todd, the other co-founder and CEO, also worked at AHL. Like Winton Capital, another venerable member of this managed futures elite, Aspect has grown strongly over the past 18 months. The seemingly insatiable appetite of institutional investors for commodity trading advisor strategies has seen Aspect grow to $6.8 billion from around $4.3 billion at the beginning of 2011.
Like quite a few other CTAs, Aspect performed well during 2008. Where it has excelled in relation to its peers is in continuing to provide returns to investors since then. Even in 2011, when most hedge fund strategies suffered drawdowns, an occurrence in which CTAs proved to be no exception, the Aspect Diversified Fund strongly outperformed. During this time, Aspect has continued to invest heavily in its research team and in its operational infrastructure as well as in establishing a UCITS product that was designed from scratch. All of this made it an appropriate time to review developments at Aspect with John Wareham, the firm’s veteran, but youthful-looking, chief commercial officer.
We discussed a wide range of issues central to the phenomenon that has propelled several leading London managers into the vanguard of the global managed futures sector. We began by addressing the healthy appetite of investors for allocations to managed futures funds. “The great majority of our rise in AUM is net new assets,” says Wareham. “There has been a consistent run of positive monthly inflows over the entire period (dating back to January 2010). It has been extremely well balanced in terms of the geographic source of the assets and the investor demographics.”
Diversified client base
As a single product manager, Aspect is keenly focused on diversification in its client base. One part of this is the geographic location of allocators. Another is their investment orientation as an organisation – whether as institutions, funds of funds or wealth management product distributors. Over the past few years, the breakdowns have remained much the same even though the asset base has grown by nearly 60%.
“I think there is a rising tide of interest in liquid, diversified, directional strategies,” says Wareham, “and for many global investors, this means managed futures. And this looks set to continue: managed futures and global macro remain very much the future for investor appetite for the same reasons that have made them a focus of investor appetite over the last 18 months. The legacy of 2008 has meant a greater need for liquidity and for diversification – they are the two different elements that investors have really focused on.”
There is also a hint of change in how investors consider the utility of the different components that sit inside their portfolio. Before the credit crunch, the core/satellite approach to institutional portfolio management embedded a key assumption. Whereas the core was stocks and bonds, it was assumed that the satellite component, whatever it might contain, would be a source of uncorrelated performance for the portfolio. The fallout from the financial crash showed that diversification wasn’t automatically the result with satellite allocations to different alternative investment strategies, including hedge funds. Nor, it turned out, could investors rely on liquidity in the satellite part of the portfolio. The upshot is that investors have demanded simpler portfolios with a demonstrably clear rationale for each component. This provides an additional impetus for investor interest in managed futures programmes.
“It is very straightforward to be clear about what the utility is for managed futures: diversification and liquidity,” says Wareham. “So in a world of utility-based portfolio construction, managed futures is an easier proposition and we see a broader range of investors looking to allocate. It also means that if managed futures are serving a core utility then the allocation can become bigger in order to better perform the function.”
Aggregate data does show that increased allocations have gone to managed futures as a proportion of overall hedge fund assets. The data from a bottom up perspective, however, is somewhat more fragmentary. Nonetheless, there are indications that some institutional investors have increased the portion of their portfolios allocated to managed futures beyond the 1-2% that might have been apportioned a few years ago. It is a combination of this and new investors coming to CTA managers that accounts for the increased level of assets in the strategy.
“With all of that said, we have been significantly buoyant on that rising tide,” says Wareham. “There is a case to be made for Aspect’s asset-raising being very strong compared to almost all of our competitors and I think that is due to competitive performance – we have outperformed over the last few years. There is also the broader value proposition Aspect represents – the institutional infrastructure, transparency and the rigour with which the business is run.”
Certainly, the performance of the Aspect Diversified Fund is among the leaders in managed futures. It shot up 25% in 2008 when CTAs as a whole saw mid-teen percentage returns. In 2009, it suffered a drawdown of 11%, but rebounded with a 15% gain in 2010. It was unusual among CTAs by building on that in 2011 with a 4.5% rise, when most funds running the strategy were down by between 6% and 9%, with some well-respected managers down substantially more. More gains in 2012 mean that Aspect Diversified is very near its high water mark, turning in a respectable performance in absolute terms and one that is highly competitive with CTA sector peers.
Several larger CTAs are running substantial amounts of capital. Winton Capital, the global leader, is managing over $29 billion with AHL, now second, managing around $20 billion. Meanwhile, Bluetrend (and related systematic programmes run by BlueCrest Capital) is running some $14 billion and Netherlands-based Transtrend is managing approximately $10 billion. It is thus natural for investors to be querying the capacity that Aspect Diversified may yet have for new allocations.
“Capacity is an issue we monitor extremely carefully,” says Wareham. “We do so because our investors are increasingly sensitive to the issue of not just manager capacity but industry capacity. Our view is that the CTA industry is not at its aggregate capacity given the current levels of activity in the markets where CTAs are most active. However, we do think there are justifiable reasons why investors would be worried about the capacity of individual managers.”
The reason why investors will look at capacity is straightforward. The utility of managed futures is directly related to their being directionally agnostic, while retaining the ability to produce leptokurtic returns when trends really kick off. In particular, these funds crucially need to be able to establish short exposure to the equity markets in an environment when that asset class veers downwards. Investors, therefore, are concerned to monitor managed futures operators to see how managers with growing funds adjust and tilt their asset mix, risk allocations, strategy risk and the gearing that sits inside that portfolio. If too many changes occur, the utility of the programme and the expected returns that attracted investors in the first place can become distorted.
“We look at our capacity carefully because investors ask us to,” says Wareham. “They ask ‘can we rely on your style purity going forward or is your own utility to raise more assets going to compel you to dilute your style purity?’ We believe our capacity, without making any changes to the programme at all, is currently comfortably in the region of $10-12 billion. We think capacity is a research project in its own right and we think there is every possibility we can extend it beyond that level. As it stands at our current $6.8-7.0 billion level we are in a good place of having capacity available if people want to continue to allocate.”
In 2008, Aspect closed three quantitative market neutral equity funds that had been developed with seed capital. The restructuring involved was minimal as the team of researchers working on the programmes was absorbed back into the core research area, though it is important to emphasise that Aspect had gone to great lengths to avoid silos being built into the business. For example, the technology platform, including data collection, trading and administration, had been entirely integrated with the broader business.
After investor money was returned from these funds, the team refocused on the Aspect Diversified Programme. The company’s investment in research has risen – and focus has been on improving the quality of returns from the trend-following strategy through a range of enhancements.
“At a high level we think about our research effort in terms of improving signal generation, portfolio construction and risk management and market access,” says Wareham. “Over the course of the last couple of years we have committed a huge effort to subtly enhancing every element of our alpha-generating and risk models.”
The market environment also saw Aspect adapt. For example, it increased the range of futures contracts being traded and sought to improve the programme’s ability to adapt to the changing volatility environment that we have observed. Its scientists did foundational research into the basic issue of doing trend-following better. The risk management and portfolio construction techniques were enhanced and improved, something Wareham says is an often underestimated source of additional value with CTAs.
“Signals are all very well but actually part of the challenge is to combine the signals from several models applied to 150 different contracts in a way that creates a coherent, stable portfolio that can be managed in an entirely systematic hands off way,” he says. “That doesn’t just happen. It needs considerable thoughtfulness in terms of the harness into which the signals are introduced. We have done a lot of work on that. I think it has been a major driver for the improved competitiveness of the programme – as shown in 2011 when our returns were more stable when there were periods of quite sharp inflection in the market place.”
On market access, Aspect has invested heavily in technology. Here the focus is on the algorithms that permit the entire portfolio to be executed on a model to market basis. Traders still execute and oversee a level of activity to keep in contact with the market and retain real time oversight of the programme. The analogy is with jet airliners: passengers may be fine with autopilot controls, but they do insist that a pilot be on board.
“As our market access has evolved, we have continued to have traders invoke our algorithms and interact with the market,” says Wareham. “But the great majority of our business is now algorithmically executed on a model to market basis. This has had a profound benefit in terms of our ability to execute with reduced levels of cost and visibility and allows us to be confident that those improvements can be sustained at higher levels of AUM.”
Like any trend follower, Aspect runs the risk of giving back some profit when a trend reverses rapidly. Through a more tightly risk controlled portfolio, the aim is to reduce temporary loss, while at the same time not reducing by the same extent the amount of upside capture that the programme is able to generate. In other words, the aim is to reduce the risk of drawdowns but not compromise on upside capture by retaining the programme’s ability to ‘harvest’ the appropriate returns when trends are strong.
“The last three years have provided a valuable test bed for our research in this area”, says Wareham. “For example, 2011 contained four of the worst months for CTAs since 2005, but our trading and risk models were able to weather the reversals and helped us protect our clients’ capital”.
Certainly, a key component of investors’ appetite for managed futures is their significant and desirable liquidity. About 80% of Aspect’s assets under management have daily access (managed account and UCITS investors) with the remainder having weekly terms. The investment characteristics of the strategy – performance and non-correlation – combined with the liquidity adds up to a forceful package for investors in 2012.
The company’s UCITS offering, the Aspect Diversified Trends Fund, was launched at the end of 2010. It has enjoyed notable success in the alternative UCITS sector by attracting $750 million of assets under management. Unusually, Aspect preferred to engineer the UCITS offering itself rather than go down the investment bank platform route that many other hedge fund firms have opted for.
Wareham says there are several advantages that flow from Aspect setting up the UCITS fund independently. For one thing, each service provider was competitively tendered so there is transparency of pricing that is absent in a bundled package. It also meant that a direct relationship could be established between the benchmark Cayman product (the Aspect Diversified Fund) and the UCITS fund in terms of costs and performance attribution.
A close fit
A major concern among investors looking at alternative UCITS is the extent to which the product is a close fit in terms of costs and construction to the offshore strategy. Here Aspect opted to use a total return swap to deliver the performance of the Aspect Diversified programme into the UCITS Aspect Diversified Trends Fund. With the cost of constructing the UCITS fund having been absorbed by Aspect, the tracking difference between the UCITS fund and its Cayman Islands benchmark amounts to a minimal two basis points since inception.
“It took us longer to build it ourselves,” says Wareham. “But we gained the confidence that the costing and construction were structured appropriately. That has allowed our investors to be confident that they can rely on the 13-year track record of our Cayman fund as the UCITS product generates returns in exactly the same way.”
Indeed, the record of the Cayman-based Aspect Diversified Fund is an important consideration for potential UCITS investors. With an average 10.2% annual return on volatility of 16.5% since inception and a record of non-correlated performance, the risk/reward profile is likely to be attractive to a wide range of institutional investors.
“Over the long term the agnosticism that our asset class displays to either the direction of a trend or to where in the globally diverse portfolio a trend develops means we are able to harvest performance from directional volatility in a general sense,” adds Wareham. “That can be an ‘up’ or a ‘down’; it could be in the commodities sector or in the financials sector. There will be times when correlation is positive as we will be long a rising market but we will also have periods of profound negative correlation where we are short of a falling market. Over the long term our performance is able to display a near zero correlation with all other asset classes.”
This is a powerful combination of utilities. It should continue to be attractive for institutional investors and others seeking real and liquid sources of diversification.