AVM Capital: Opportunistic Global Macro

A data-driven approach that eliminates cognitive bias

Hamlin Lovell
Originally published on 25 October 2022

AVM founder and CIO, Ashvin Murthy, featured in The Hedge Fund Journal’s 2022 Tomorrow’s Titans report on rising star hedge fund managers, and his macro fund, AVM Global Opportunity Fund, was an award winner at The Hedge Fund Journal CTA and Discretionary Trader Awards 2022.

Since inception in November 2016, AVM has surpassed its own targets for risk adjusted returns. It delivered a Sharpe ratio above 1.5, maintained single digit volatility with a focus on capital preservation, while using less leverage than most other macro strategies. The fund has seen a strong uptake with assets under management almost doubling in the last year to over $160 million. The firm has wide market coverage through ten ISDA counterparties with global investment banks such as its prime brokers, JP Morgan and Societe Generale.

Murthy studied engineering and financial engineering in France and the US and worked on the sell side in fixed income and currency structuring, market making and proprietary trading for UBS and Natixis in the UK, Singapore, Switzerland and Hong Kong, before setting up the AVM macro strategy in Singapore.

We have no bias to be long or short. The positioning has been driven by what we see as best risk reward based on the world and economic data.

Ashvin Murthy, Founder and CIO, AVM Capital

Exposures are geographically opportunistic, based on perceived risk/reward, across North America, Europe, Asia and various emerging markets. “However, given our geographical location, Asia does often become the largest sleeve as it was in August 2022,” says Murthy, who has recently been positioned for the Singapore monetary authorities to bolster the currency and bear down on inflationary pressures. The strategy trades fixed income, equities, foreign exchange and commodities. All four asset classes have contributed positively between inception in November 2016 and August 2022. Fixed income has made just over half of net profits, and equities just over a quarter, with currencies and commodities each contributing around one tenth. The most profitable calendar months have been helped by longs in Eurozone financials in January 2018, US government bonds in August 2019 and investment grade bonds in April 2020, when a short in oil was also profitable. 

Trading long and short through multiple cycles

Since starting the fund, Murthy has witnessed three full cycles including Covid, or two excluding Covid: “There was Trump, recession outside the US, global recovery, trade wars, the Covid crisis and recovery. If you take out Covid, we are now in the second cycle. In August/September 2022 we judge the economy to be very late cycle, with inflation peaking and central banks tightening policy into a slowing economy, which creates a recession risk. Central banks are behind the extreme boom and likely bust,” points out Murthy.

Ashvin Murthy, Founder and CIO, AVM Capital

To capitalize on these cycles, most markets have been traded long and short at different times: AVM has expressed bullish and bearish views across different assets and markets including oil, gold and copper; US dollar, Singapore dollar and Chinese Yuan; US and Indian equities and US and European bonds. “We have no bias to be long or short. The positioning has been driven by what we see as best risk reward based on the world and economic data,” says Murthy.

The strategy is also opportunistic in asset class selection: it does not always have exposure to all four asset classes. There has sometimes been a hiatus in currencies or commodities when ideas and themes can be better expressed in other markets. 

Here we highlight a handful of key trade themes over the fund’s life:-

Short and long bonds

The strategy kicked off in November 2016 with a reflation theme, shorting treasuries after Trump was elected, and the higher US rates theme recurred through most of 2017 and part of 2018. It also broadened out into wagering on increased German interest rates. The US rates trend further fed into shorting some emerging market currencies in 2017; though AVM was also short USD in early 2018. Profits were taken intermittently as part of the tactical trading theme and long credit was exited in April 2018 when Murthy judged that the cycle was maturing. 

By late 2018 and early 2019, AVM had shifted to a slowing growth stance: long of US and Australian bond markets, with Chinese, Korean and Canadian bonds added later on, and short of copper. There were also some equity shorts in late 2018, but by early 2019 the strategy had shifted to long Chinese equity exposure. By late 2019, AVM started taking profits on long bond positions, and reversing into some shorts while the strategy had started buying emerging markets currencies against USD. EMFX traded by the fund include Brazilian Real, Mexican Peso, Polish Zloty, South African Rand, Korean Won, Taiwan Dollar, Indian Rupee and Chinese Yuan.

Liquidity tends to disappear when you need it the most. Since the GFC, assets under management have grown substantially, but the liquidity pool has been shrinking as market makers face tougher regulations.

Ashvin Murthy, Founder and CIO, AVM Capital

Navigating the Covid crisis and recovery

AVM maintained a nimble approach during the Covid crisis. The strategy shifted to a defensive position in late January 2020 when China went into a lockdown, envisaging a high probability that the Covid issue would not be confined to China but would spread to the rest of the world. The fund was prepared for a deleveraging scenario, via owning equity puts and holding a long dollar position. While these positions performed well in March during the market meltdown, AVM closed them out once the Fed came in to support the markets, and accumulated positions geared to central bank support and lower rates such as US treasuries, investment grade bonds, and mortgage REITs. AVM was one of the handful of funds that made money in each of the first five months of 2020, capturing the sharp moves down in February and March, as well as the rebound in April and May. As markets moved from risk off to risk on over the year, the strategy also moved from long US dollar to short US dollar positions, versus Asian currencies. 

Trading of gold in 2020 was similarly tactical: AVM accurately anticipated that the metal would be vulnerable to deleveraging in the heart of the crisis. Gold later became a core long position, expressed through both futures and options. 

By 2021 the strategy had repositioned to anticipate above consensus rate hikes as well as yield curve steepening in a number of countries, and by late 2021 the strategy had started to short gold based on higher real rates. AVM was also long of copper and oil as global growth was robust. US equities, with some hedges and tactical trading, were also significant contributors in 2021, based on strong earnings growth. 

A new paradigm in 2022

January 2022 marked a sea change in positioning: equities and oil were exited due to slowing growth and corporate earnings, and monetary tightening in most regions, though in China the expectation was for easing. By March 2022 AVM was net short equities and had started shorting the Chinese currency. Trading was tactical and profits were periodically taken on the shorts before putting them back on.

Directional and relative value trading

The fund has sometimes had US versus Europe equity or bond trades, but directional trading has contributed more than relative value trading, which Murthy views as, “A short volatility trade that performs better in lower volatility regimes and can blow up in higher volatility regimes. The more volatile markets of 2020 and 2021 have not been ideal for relative value”. In any case, the fund’s 200% cap on 10-year US treasury equivalent leverage limits how much risk is allocated to relative value trades such as flatteners or steepeners.

Eurozone relative value plays have included being positioned for wider spreads on French versus German bonds in late 2018, and later on, the opposite dynamics with a view on Italian spreads tightening by mid-2019. Murthy also categorizes currency trades without the dollar as relative value; in August 2022 the only relative value position was a Singapore Dollar basket trade. 


“Since the Fund started, it has generated positive monthly returns 75% of the time, and it has never lost more than 4% in a month. This is testament to our strict risk management policy and our investment framework that targets trades with high win loss ratios,” says Leon Lee, Head of Business Development. 

High hit rates

“Since the Fund started, it has generated positive monthly returns 75% of the time, and it has never lost more than 4% in a month. This is testament to our strict risk management policy and our investment framework that targets trades with high win loss ratios,” says Leon Lee, Head of Business Development.

The win: loss ratio is also positively skewed partly as the fund tends to set stop loss limits at the inception of each trade while letting its winning trades ride for extended period of times (as long as macro drivers supporting the trade are valid). AVM’s losing months have sometimes seen the strategy exit previous winning positions on trailing stops.

Trading style

The hit rate is higher than a typical macro discretionary fund, and the style of trading is also different. In contrast to a trend follower, Murthy is not generally trading breakouts and nor does he need to await reversals before exiting trades. “We tend to be early on new themes and generally stick with them if they are still valid. We got into the inflation trade quite early in 2021 and have also taken profits on it before the peak in 2022,” says Murthy. AVM does not trade inflation linked bonds, but expresses inflation views via nominal bonds and other asset classes.

A hybrid process

The strategy is broadly categorized as discretionary macro, though there is systematic analysis of data relationships between macro variables and asset prices. Similarly, it could be bucketed as fundamental macro since fundamental analysis is used to select trades, but it employs a systematic quantitative method to trade around core positions, based on volatility and trends. 

Historical and contemporaneous data

Research inputs come from proprietary models, brokers and independent research providers. Analysis is based on 50 years of historical data and Murthy does generally find enough historical parallels for different indicators, cycles and policy tools, such as fiscal or monetary stimulus, to gauge correlation patterns: “There is a tendency to believe that this time is different, but we find cycles tend to repeat. We apply probabilities based on the data, and put on trades with the best risk reward ratios. It is important to separate the signal from the noise and the facts from the feelings”.

As well as decades of data history, contemporaneous high frequency “nowcasting” datasets have provided early insights on inflation, and have been especially useful in some markets such as Australia and Canada where official data is released two months late or with longer time lags. “We were not surprised that US inflation in August 2022 came in below consensus. We do not change our mind based on one data point and would rather see a few data points before we change our views,” says Murthy.

To complement the historical and current data analysis, AVM also stress tests the portfolio for specific risks and correlation breakdowns. AVM argues that many asset managers presume stable patterns of beta and correlation, but Murthy prefers to be more open minded and constructs the portfolio in a way that is designed to withstand regime changes.

Correlation analysis does play a role in building the book. There is a deliberate effort to choose less correlated themes to reduce portfolio risk and volatility. “But we do not diversify for its own sake. This is not a risk parity framework. All trades are intended to be profit centres, apart from some tail risk hedges,” says Murthy. 

Options, instruments and volatility

Murthy’s sell side career in fixed income structuring and currency option market making has been useful in forming a top-down view. “Monitoring cross asset correlation books and regime changes has been especially useful for running a multi-asset portfolio,” says Murthy. It also means he is well versed in derivatives, but avoids the most intricate structures as he prefers to stick to more liquid parts of the derivatives market. This was one of the lessons learnt from the GFC in 2008 as liquidity dried up, particularly amongst complex derivatives.

AVM trades mainly exchange-listed linear instruments and plain vanilla options, but can occasionally pursue an exotic option trade such as knockouts for some European trades. “There would have to be a good reason to do something more exotic,” says Murthy.

So far, 2022 to August has broadly seen an expansion of implied volatility pricing for commodities, bonds and currencies and some contraction for equities, and there are different opinions about the relative value of options in different asset classes. AVM has developed proprietary screens for option valuation versus realized volatility. Murthy assesses that, “Bond and currency implied volatility were cheap for a long time and are now fair value versus realized volatility. Commodity volatility has gone from expensive to fair value. Equity volatility, currently around fair value, has cheapened due to technical factors such as supply from systematic managers”.

A granular approach

The strategy is more granular than some macro approaches in that it can also drill down into countries, sectors and even sectors within countries. For instance, AVM built up a position in Eurozone financials in 2017 as part of a European recovery theme, which also transitioned to a constructive stance on Spain, expressed through Spanish equities and Spanish financial credits, and later Spanish government bonds

AVM has sometimes implemented both equity and credit market ideas through country sectors and sub-sectors, such as Japanese retail, US oil and gas, US REITs, Korean or Taiwan technology, and China infrastructure, rather than broad macro indices. But the strategy stops short of stock picking:  standardised products such as ETFs have been used to pinpoint corporate sectors and countries, and a close eye is always kept on monitoring liquidity. 

Understanding the liquidity of instruments is critical, and liquidity tends to disappear when you need it the most. Since the GFC, assets under management have grown substantially, but the liquidity pool has been shrinking as market makers face tougher regulations,” says Murthy, who estimates strategy capacity of at least $1 billion.

Beyond illiquidity, geopolitics can rule out some markets. AVM ceased trading Russian markets after the 2018 round of sanctions and has not returned to them (though there is currently no ESG policy as such). 

Outlook/current commentary

Murthy’s Autumn 2022 outlook illustrates his selective, cautious and patient approach. He may avoid some markets for extended periods until there is enough data to build stronger conviction.

Patiently awaiting clarity on China

AVM had been long Chinese equities until February 2021, but exited initially after they started to tighten monetary policy, and later due to regulatory concerns. The fund has continued to avoid any long or short exposure to Chinese equities. Murthy’s view is that, “However cheap the market looks, unpredictable regulatory policy risk, such as the need to completely fix the property market, outweighs the value case. China’s regulatory landscape is less predictable than the US”.

There are high hopes for China reopening in October 2022, but Murthy expects this may be delayed and staggered: “It might take a year or so but politics change daily and it may take more time for them to work out how to manage Covid”. For much of 2022 his view on China’s growth was below consensus, though the consensus itself has also now been downgraded as the data has disappointed. Murthy is closely watching China’s credit markets to get comfort on a recovery and is seeing some signs of remedial policies: “They are going down the right path and will not let it all implode. They are using policy such as local government spending on infrastructure to support markets, and getting policy banks to backstop loans from private developers. The policy stimulus is now moving towards more targeted fiscal policy rather than broad QE which just raises asset prices”. China has already been able to relax monetary policy without stoking inflation, partly because the government controls some prices through state owned enterprises.

Avoiding most commodities in 2022

AVM has mainly avoided commodities since Russia’s invasion of Ukraine as Murthy was of the opinion that, “Geopolitics became more important than macroeconomic data in driving commodity prices and we do not have an edge in geopolitics. Over the past few years, we’ve seen many investors claiming to be experts on a variety of issues like Covid, Brexit, and geopolitics. We prefer to stick to our core strength of trading markets with a strong link to macroeconomic data, that are least impacted by geopolitics which can be unpredictable”. For instance, in industrial metals, Murthy has been confident of data indicating oversupply, and has returned to the short copper trade that served him well in former slowdowns.

In contrast, he has taken a break from precious metals after profiting on both sides of the market, owning gold in 2020 and shorting it in 2021 based on the trajectory of real interest rates. “In 2022 the story has been complicated by flows due to the war. We are awaiting the end of the Fed rate hike cycle and imminent recession before revisiting the gold trade,” says Murthy. Murthy also expects that the currency carry trade could also become most appealing when a US recession stabilizes rates and devalues the US dollar. Then currencies such as the Brazilian Real and Mexican Peso might generate double digit carry.

US and European rates 

Murthy’s base case is that US rates will peak in March 2023, whereas the consensus regularly jumps back and forth. He acknowledges that terminal rates are hard to predict and points out that the UK March 2023 contract recently jumped by 70 basis points in one week in response to inflation data. Nonetheless, he retains high conviction that ECB rates will continue to rise above consensus forecasts: “They could easily hike another 2 or 3% and we expect more rate rises than the market expects by March 2023”.

Tactically shorting equities 

Murthy has been tactical in shorting equities in 2022. Having covered most of the short in April, he paused for breath before spending much of July and August scaling into a US equity short, adding to the trade at progressively higher prices. “We view the summer rally as a ‘bear market rally’ driven by short covering, and FOMO from retail and institutions. We judge that all of the fundamentals are negative for equities: the dollar is stronger, credit spreads have widened and AVM’s outlook is well below consensus for US economic growth and corporate profits”. The only bullish signals have been contrarian ones: positioning in futures has been bearish, sometimes as much as four standard deviations below historical levels, and asset managers’ cash holdings are well above the norm. This has dictated the cautious and tactical stance on the short book.

Short Euro 

AVM has historically expressed a bearish view on Europe by trading French and Italian government spreads versus German yields, but in 2022 has rejected an Italian spread trade in favour of shorting the European single currency. “Italian spreads are correlated with a short Euro position, so we opted for the currency position as it was more liquid,” says Murthy. A Russia/Ukraine ceasefire or peace deal could be one event risk for the short Euro trade, but AVM has capped risk by implementing the trade mainly via options.

Inflation and rates

AVM’s base case view is that markets are in a late-stage cycle, with slowing economies, lower corporate profits and a stronger US dollar ahead. While Murthy feels confident that inflation has peaked, it might take several years to normalize, which also means that rate hikes could be larger and longer lasting than consensus: “People are underestimating how far and fast rate hikes could go, especially in countries such as Canada”. The trajectory could also be partly path-dependent: “More rate hikes sooner could reduce the need for more rate hikes later on”.

Murthy is expressing these core strategic views, but they are always tempered by sensitivity to tactical market moves.