Emerging Manager Forum

Originally published in the July/August 2011 issue

Managers: Robert Baguenault de Viéville & Raphaël Gelrubin
Location: Paris
Strategy: Systematic CTA

Key Trends is one new quant fund where the Sharpe ratio since real money trading started is not far away from the backtested ratio of 1.7. Since inception in January 2010, its first year performance of 43% looks more like a 2008 number for a typical trend following CTA, but this programme has a number of differentiators. The Key Trends fund looks not only for strong trends – but also those that its suite of technical, behavioural and economic models indicate have a high probability of continuing. The same models are used for all markets traded to reduce the risk of over-fitting, and the aim is to identify trends earlier and exit more swiftly after trends reverse. As well as analysing technical data, the fund has fundamental economic inputs in the form of the proprietary Global Economic Factor that gauges the durability of trends. Behavioural finance also has a role in this fund, which simulates the risk appetites of virtual investors. Key Trends trades 50 liquid futures markets, including fixed income, equity indices, currencies and commodities. Positions are sized with reference to both their standalone volatility and their marginal contribution to fund volatility. The two managers, aeronautical engineer de Viéville and mathematician Gelrubin cut their teeth at Man Group’s Man-Fidex division. KeyQuant SAS sits in the same Champs Elysees office as statistical arbitrageurs Finaltis.

Auspice Capital
Managers: Tim Pickering
Location: Calgary, Canada
Strategy: Systematic multi-strategy
Assets: $230 million

Auspice founder Tim Pickering previously traded natural gas options for Shell North America, and financials for TD Securities. He has always used systematic, quantitative trading approaches and has developed automated algorithmic trading methods to increase his opportunity set. Auspice defines the concept of Next Generation CTA as a company offering investors a wide spectrum of innovative products. Auspice offers passive strategies, through developing ‘third generation’ commodity indices that optimise contract rolls amongst other features, are published by NYSE, and have been licensed by the Claymore family of ETFs. The firm’s first active product was Auspice Diversified, which has been 70-80% correlated with traditional trend following funds over the past four years, but with margin to equity usage averaging at 6% – well below the norm for a CTA. This fund has annualised at 12.8% over four years, with a worst drawdown of just 11% that is somewhat less than many competing programmes. Auspice has just launched an energy strategy, which trades across the full energy complex, from heating oil to kerosene and natural gas. The multi-strategy vehicle employs an eclectic repertoire of strategies, ranging from following trends over many timeframes to trend optimisation strategies.


Manager: Steve Edwards
Location: Norwalk, Connecticut USA
Strategy: Quantitative macro multi-strategy
Assets: $50 million

While Steve Edwards started his quantitative investing career at giant Bridgewater, both the simulated and live trading results demonstrated low correlations to Bridgewater’s return profile. One thing that they do share in common is codifying fundamental economic indicators into trading signals. For each of the 200-plus liquid tradable instruments it follows, such as the S&P 500 Index futures, Frontera monitors 50 to 100 indicators. Some 70% of these indicators reflect economic momentum, which Frontera views as the intermediate-term market driver. The other 30% of the variables are a mixture of technical and valuation factors. Frontera insists that trading rules must make intuitive sense and also work through market cycles. Volatility of 12% is targeted at the fund level, but this target gets dynamically scaled back by 10% for every percentage point drawdown, with 2.4% being the fund’s lowest volatility target. There are additional volatility caps at the asset class, sector, and position levels. Unusually, 20% of the book comes from relative-value trades. Trading up to 20% of the fund on a discretionary basis also distinguishes Frontera from most quant macro funds. One recent discretionary trade involved owning Northern European equities against a short in Southern European equities to exploit investor concerns over government debt in some Mediterranean countries.

Manager: Florian Wagner
Location: Liechtenstein and Graz, Austria
Strategy: Systematic CTA
Assets: $55 million

Qbasis is perhaps most famous for its 145% return in 2008, but the MF Futures system developed by Ziad Chahal started in 1997. The core strategy is always present in all markets it trades, with either a long or a short position. The aim is to identify trends early, but not to try and anticipate them: the systems are reactive rather than predictive. Individual market risk is diversified with no more than 0.25% risked per position across the 90 liquid futures markets traded. Position sizes are also adaptively adjusted to volatility. Risk is further reduced because one-third of Qbasis is sub-allocated to the MF Plus strategy, that profits from the types of range-bound oscillating markets where trend following systems struggle. Timeframe risk is diversified by running systems that trade over a range of timespans from intraday to multi-month. One risk that is not capped is volatility because Qbasis believe that a more fully invested CTA programme can act as a better value insurance policy than one where risk is being diluted. Qbasis was explicitly designed as a diversifier for equity risk, although it can also be viewed as an independent investment. Currently an offshore Cayman fund is complemented by a Hamburg-listed, UCITS-compliant ETF. Qbasis are exploring the possibility of setting up distribution channels including managed accounts and UCITS funds.

Rotella Texo
Managers: Veeru Perianan
Location: Chicago
Strategy: Systematic Pairs Trading
Assets: $53 million

Though it only uses technical price data, the Texo strategy does not show correlation to other technical traders such as traditional trend following CTAs or to shorter-term systematic traders. Rotella trades pairs within the same asset class, using two models: sometimes the funds expect the spread between pairs to converge and sometimes they bet on it diverging. The lack of correlation between these two models helps to keep volatility within the target band of 8-12%. Texo uses cointegration techniques to identify related pairs and volatility filtering to find scope for divergence. Whereas many systematic pairs traders focus on single stocks, and often trade thousands of them, Texo trades around 30 of the most liquid major futures contracts on equity indices, fixed income and currencies. While some pair trading funds are trading at high frequencies such as intraday, Texo has holding periods between one and two weeks. Stop losses are applied at the position level, and the manager can exercise discretion to reduce risk if a drawdown touches 80% of portfolio volatility levels. The Sharpe ratio has been close to 1 since the programme started, and that is a real money Sharpe. Realised volatility has somewhat undershot the lower end of the 8-12% target band. The programme was piloted internally from June 2007 before being rolled out to external investors in November 2009.

Cardwell Investment Technologies
Managers: Barnaby Cardwell
Location: London
Strategy: CTA
Assets: $11 million

Cardwell Global fund launched in November 2008, just as many CTAs were closing in on their best year since 1998. But Cardwell, founded by Sunday Times under 30 rich list prop trader Barnaby Cardwell, differs from other CTAs: it has a hard 10% drawdown limit, and its returns (in double digits so far, excluding fixed costs currently covered by the manager) have been negatively correlated to those of CTA indices and large CTAs. The fund’s worst drawdown since inception has been only 6%, and putting May and June 2010 together it was slightly up across the two months that inflicted losses on traditional CTAs. Cardwell’s strategy is therefore an excellent diversifier versus traditional trend following CTAs, as well as offering a robust risk reward ratio on a standalone basis: the best month was up 10.3% while the worst lost 4.28%. Trend is only one of Cardwell’s models, which also include momentum, congestion breaks and time biased situations. Cardwell’s ideas on data analysis, back-testing, optimisation and execution are turned into proprietary models by Imperial College statistical signals PhD Xiao Lei Wang and a highly experienced team of programmers and statisticians. More than 60 markets – futures, cash currencies and LME forwards – are traded over multiple timeframes. A 3X levered version lets investors up the ante of volatility. Dedicated managed accounts are available with full transparency.

Butler Investment Managers
Manager: Walter Butler
Location: London
Strategy: Fundamental Credit
AUM: $130 million

The WB Opportunities Fund (WBO), seeded by Man Investments in 2009, is a fundamental credit opportunity fund taking long and short positions in mispriced European debt securities, and securities of European companies involved in special situations, primarily European high yield. The fund has a flexible, opportunistic mandate that seeks to exploit mispriced credits, arbitrage opportunities, but not yield, with a strong focus on risk management and capital preservation. The fund beat its 12% performance target with a return of 16% in 2010 with low volatility of 5%. It doesn’t invest in financials. The firm is characterised by strong macro and fundamental analysis. The European high yield market is only about a decade old and has doubled in size since 2008 with $40 billion in new issuance in 2010 and at least a further $30 billion to come in 2011. This fast growth is matched with a paucity of research. Butler estimates that only 25% of issuance is covered by institutional research. Managing beta is a priority to dampen risk. Butler estimates they can shift from near-100% beta exposure to 0 in about 10 days. Cash and derivatives aremanaged as separate books; both are expected to generate returns. The long-term aim is to triple AUM and continue to use the existing trading strategy. Though the focus is on Europe up to 20% of the fund can be invested outside of it.

Majestic Asset Management

Managers: Denis Paquette, David Bilodeau
Location: Montreal
Strategy: Managed Futures
AUM: $12 million

The Majestic Global Diversified Fund is a multi-strategy programme covering around 80 global futures markets. Board members have invested around $5.5 million in the fund and the principals also manage a fund for a family offce. The overriding objective is to give investors returns that are non-correlated to equities, bonds and real estate. The fund combines quantitative and systematic trading strategies, and is completely algorithmic. It looks to beat the returns of the S&P 500, but with a lower volatility profile. Since launch in September 2008 the fund has chalked up a 10.1% annualised return with nearly six months in 10 showing positive performance. The co-managers both come from a trading background with Paquette having done pit trading for five years. The fund limits itself to 35 positions. The maximum risk loss is 0.6% and no trade is allowed to be greater than 3% of a market’s daily volume. Around 40% of trades are less than 20 days, with 30% between 20 and 40 days and 30% extending over 40 days. Risk controls are put on position, sector and portfolio levels. The principals believe that markets are inherently impossible to predict and want to use systematic techniques to sidestep emotional responses. Their risk management helped the fund steer through the May 2010 flash crash and post a 5.9% gain.