Audentia Capital Group’s Audentia World FX Fund received The Hedge Fund Journal’s “2019 CTA Performance Award” for the best performing fund over 3 years in the Currency Specialist CTA (<25m) category since when assets have grown to $60m. It made just over 50% between inception in November 2015 and March 2019, working out at annualised returns of over 12%. The volatility has been around 4%, meaning that the Sharpe ratio has been extraordinarily high, over three. The correlation to conventional asset classes has, on average, been near zero, and the strategy has generally been positive during turbulent financial markets: it profited during episodes including the Chinese stock market sell-off between November 2015 and February 2016; Brexit in June 2016; Turkey in August 2018; the global equity sell-off in December 2018, and the Japanese flash crash in January 2019.
The strategy focuses on G10 currencies (USD; EUR; JPY; GBP; CHF; AUD; CAD; NZD; SEK; NOK) but, unlike some currency strategies, it does not only trade them against the US dollar. Trading all possible pairs including the “cross” rates results in 45 possible trades.
Audentia’s unique FX trading system draws on diverse influences: the professional careers of the key staff, and academic research. The managers have long experience of discretionary and systematic trading combined with risk management, some of it at FX brokerages. Alberto Llaneza Martín, CEO, Investment Committee and Board Member, founded Audentia in 2012 after 20 years in financial markets at UBS Warburg, Dresdner Kleinwort Benson, Unicredit HVB and Societe Generale. Other key FX team members include Javier Garcia Berbel, Head of Trading, who worked for brokers integrating trading and execution systems, and now handles the MetaQuotes systems and risk management, and has integrated MT4 and Fix API. Trader and CAIA Charterholder, Andres Gonzalez Serrano has previously been a proprietary trader and has worked for firms such as HSBC. Quant trader, Agustin Sanchez Blasco, has traded AI and algorithms, and manages two other quants. The internal risk manager is Guillermo Gonzalez Bartoleme, who has been a proprietary futures trader and risk manager, while the external risk manager is Simon Grima, an academic at the University of Malta, who is also President of the Malta Association of Risk Management – and a Board and Investment Committee member of Audentia.
It is easy to identify cointegrated pairs of currencies, such as the Australian and Canadian dollars. The difficulty lies in identifying the timing and price levels at which reversals in cointegration occur.
Alberto Llaneza Martín, CEO, Investment Committee and Board Member, Audentia Capital Group
The core system is based on a multiple cointegration theory, which may sound similar to statistical arbitrage and mean reversion, but is actually different. It is described as a “swing” system that trades ranges, and Audentia traces the origins of the concept back to the Morgan Stanley Quant Team in the 1980s, who used it for trading stocks.
“It is easy to identify cointegrated pairs of currencies, such as the Australian and Canadian dollars. The difficulty lies in identifying the timing and price levels at which reversals in cointegration occur. We use a variety of advanced statistical techniques to inform this analysis,” says Martin.
To gauge the existence, persistence and strength of cointegration, Audentia uses the Philips-Ouliaris residual based unit root test, which marks an advance on the Engle-Granger test. The Johansen test is also superior to the Engle-Granger test, as there is no need to select a dependent variable. The Hurst exponent helps to determine if a time series is trending or mean-reverting. The half-life of mean reversion is also gauged using the Ornstein-Uhlenbeck process, which is another way of feeding into risk management.
On top of the statistical evidence for multiple cointegration, Audentia argue that there is a fundamental rationale based on eliminating multilateral import/export arbitrage opportunities. If exchange rates move too far out of kilter, it would make sense to rebalance trade patterns, which in turn would shift demand for certain currencies and eventually restore equilibrium.
The core system is complemented by a variable number of satellite systems. Audentia now has around 20 systems, and there has been some turnover: “on average, four or five have been added, and one or two deleted, each year. The aim is that the number of systems keeps growing, but we have a very strict process for adding a new system, which includes extensive back-testing, and trading with real money for at least a year before it is added to the fund portfolio,” says Martin.
Most importantly, the average correlation amongst the 20 systems is only about 0.13. The intraday hedging system will sometimes take positions on the opposite side of the multiple cointegration system, but the two trade types have different timeframes and so are likely to be exited at different times. The momentum family of systems are broken down into: trend-following; trend-following after pullbacks, and counter-trend, and are triggered by signals that identify a build-up of buying or selling pressure.
Three “scalper” sub-systems are based on oversold/overbought measures. There are three sub-systems under the scalper umbrella: the data trading system, based on policy shifts and data surprises; technical trading, a short-term trending system inspired by Larry Connors and Cesar Alvarez; and the night scalper system, designed for lower liquidity markets where there is a premium on obtaining good execution.
Weightings to the three sets of systems – multiple cointegration, momentum and intraday – vary but are typically around 40%, 30% and 30% respectively. The weights fluctuate with opportunities. Allocations to the 45 currency pairs also move around with the opportunity set. “For instance, Euro/US Dollar had a higher allocation when it was more volatile but has been scaled back now that its volatility is reduced,” says Martin.
Audentia does some short term and intraday trading – down to a time frame of minutes for the scalper systems – but is certainly not a high frequency trader. Its trade frequency is measured in microseconds, rather than milliseconds.
Brokers used (such as FXCM and Saxo) aggregate quotes from other banks, brokers, and ECNs. The highest bid/offer spreads seen are around two pips, and occasionally Audentia has witnessed zero spreads or even negative spreads – meaning that bids are above offers. Offsetting signals are not netted off at the execution level, because each system has an independent allocation.
“The main capacity constraint lies in the shorter-term systems. An informal capacity is probably around several hundred million euros, but this is not a hard target, and would be reviewed at regular intervals,” says Martin.
He sees some scope to expand the system to equities, both single stocks and indices, but does not expect the system would work well in emerging market currencies, because the importance of exogenous events reduces the power of quantitative trading systems.
Audentia plans to offer the FX strategy in two UCITS wrappers. Though over 100 Malta-domiciled UCITS do exist, neither of the planned vehicles will be Maltese. “One will be a Luxembourg-domiciled UCITS, in collaboration with a Swiss private bank. The other will be a Spanish-domiciled UCITS, in collaboration with a Spanish private bank,” says Martin.
Malta joined the European Union in May 2004 and though Malta was once a British colony, there are no signs of any “Mexit” movement.
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Malta joined the European Union in May 2004 and though Malta was once a British colony, there are no signs of any “Mexit” movement. As an EU member, Malta is a domicile for EU fund structures, with over 100 AIFs, over 400 funds wrapped in its own PIF (Professional Investor Fund) structure, and over 100 UCITS. Taken together they had assets of EUR 10.8 billion at the end of 2017, per Malta Finance. Malta can avail of EU manager and fund passporting regimes, which have not yet been extended to third countries (and possibly may never be).
Malta is well known as a domicile for De Minimis AIFMs (with gross assets below EUR 100 million, or EUR 500 million for vehicles with at least five year lock ups), but Audentia is registered with the MFSA as a full scope AIFM under AIFMD. The platform is home to over 50 funds, which it claims is more than any other platform in Malta.
Its Malta-domicile vehicles include two umbrella SICAVs, with 37 and 14 cell funds respectively. There are also single fund SICAVs.
xs, a securitisation structure, and a bond participation structure with ISIN numbers, are other possible vehicles. For instance, Audentia has also worked with several banks to securitise Spanish mortgage bonds.
Audentia is also starting to become very successful in Luxembourg, where it has passported their Manco, and the domiciled RAIF umbrella currently contains three funds, with some others under project.
The asset classes and strategies range from liquid ones such as foreign exchange and derivatives, to illiquids including private debt, real estate and private equity. Of Audentia’s c.EUR 600 million assets, around 40% is internal and 60% is external capital, made up of white label funds advised by third party managers, some of which are seeded by Audentia. Of the c.EUR 240 million of internal assets, 65% is Audentia World Equity Fund, 25% is the FX strategy, and 10% is Audentia Top Talent Fund, which seeds other funds.
“Audentia’s third party, white label funds, are branded under Audential Capital Private Labelling, and have access to the same benefits as our in-house funds,” says Martin. External managers of white label products include Ever Capital Investments and Alhambra Partners, in Spain, and Carthesio Asset Management, in Lugano, Switzerland.
A Malta SICAV offers more flexibility than some other fund vehicles, which preclude certain asset classes or set minimum levels of portfolio and/or counterparty diversification. It is possible to run a Malta vehicle that is 100% invested in one asset, and/or 100% exposed to one counterparty. This facilitates investment vehicles exposed to securitisation, cryptocurrency assets and so on.
The existing Audentia World FX Fund uses EY as auditor; KPMG as legal adviser; Trident Trust as administrator; BBVA as bank, and Saxobank/Credinvest as brokers. New funds might choose one or more of the same providers, or may have their own preferences.
The Audentia platform’s existing framework of service providers include two leading administrators, Trident Trust or Alter Domus, for administration. The auditor needs to be EY or KPMG, but managers are also free to choose their own providers such as brokers. For certain types of Malta-domiciled vehicles, including the PIF and SICAV, Malta allows custodians to be based outside the island, and Audentia has obtained competitive pricing from Banco Santander. All kinds of Malta funds can work with administrators outside the island; the main local constraint (which is not currently relevant to Audentia’s platform) is that Malta UCITS would require a local custodian. Full scope AIFMD funds will also require a depositary.
The smallest sensible level of assets with which to launch a strategy depends partly on the return profile. Martin argues that, “with a double-digit return target, it makes sense to launch a fund with as little as EUR 3 million”. He claims there are “lower compartment and maintenance costs, and lower costs of custody, clearing and brokerage” than may apply for some other vehicles in some other EU domiciles. Audentia aims to use its buying power to obtain competitive terms from service providers including brokers. “The fixed costs of operating a fund in Malta can vary with factors such as the frequency of NAV calculation, but might start around EUR 30,000 per year. This could be a fraction of other financial centres,” according to Martin. “The reasons for the lower costs include the fact that the Maltese management company is cheaper. The audit cost may also be lower – even the big four audit firms may charge 65% or 75% less for an audit in Malta than one in Ireland or Luxembourg,” he adds.
Yet the overall structure could still benefit from the brand recognition of Luxembourg as a vehicle domicile, in cases where the Luxembourg RAIF can be used. There, Martin claims they can be 50% more competitive than the market standards.
Malta may be somewhat cheaper than some other EU fund hubs, but Martin is not necessarily claiming it to be the very lowest cost location in the EU or Europe.
“Malta itself levies no capital gains tax or dividend withholding tax on funds. Where funds are invested in other countries, Malta offers a competitive range of double tax treaties,” says Martin.
The MFSA response to ESMA’s consultation on delegation naturally re-affirmed Malta’s commitment to the delegation model, which is of course existential to all of the EU fund hubs.
“Predicting the post-Brexit situation will of course depend on the terms of (any) exit agreement. Our base case is that UK managers should continue to act as advisors, just as other third country managers do currently, in the US and elsewhere. We doubt whether UK management companies would continue to avail of a passporting post-Brexit,” says Martin. The circular discussing the Memorandum of Understanding between the MFSA and the UK FCA in the event of a No-Deal Brexit, was, perhaps auspiciously, published on February 14th, 2019 – Valentine’s Day.
Audentia submits fund data to databases such as Bloomberg, Reuters, EurekaHedge, Barclayhedge, Morningstar, and Quantalys, which puts funds on the radar of many thousands of potential investors, who can then make direct contact with managers. At present, Audentia’s main avenue for distributing funds is reverse solicitation regimes, whereby qualified investors approach the manager, as permitted under the 2011 AIFMD. For instance, Audentia has raised capital from clients outside the EU in Turkey, Brazil, Mexico and Colombia, via reverse enquiry. Audentia has also availed of the AIFMD full scope passport, so far for Spain, where it also has an office in Madrid.
In Switzerland, Audentia has partnered with Open Funds to distribute some funds.
In total, Audentia has relationships with six fund platforms: Vestima (Clearstream Group), FundSettle (Euroclear Group), UBS, Inversis Bank, Six Six and Allfunds Bank to help with distribution.