Montlake North MaxQ Macro UCITS

Readying EM Macro UCITS amid evolving macro climate

Hamlin Lovell
Originally published in the April | May 2019 issue

North Asset Management’s (“North”) North MaxQ Macro UCITS Fund received The Hedge Fund Journal’s “UCITS Hedge” award for best performing global macro fund during 2018. The weekly-dealing UCITS was set up on the Montlake platform (also a THFJ award winner) in 2014 in response to a reverse enquiry from an existing investor. The UCITS has (after its first year) had minimal tracking error vis a vis the flagship Cayman strategy; the two run pari passu, trading simultaneously with the same counterparties. This core macro strategy is lead-managed by North co-founder, George Papamarkakis, formerly Managing Director of Morgan Stanley’s Fixed Income Department. It dates back to 2002 and (apart from the first two months) has a Sharpe ratio of around 0.6 over 16 years.

North also runs an emerging market (EM) macro strategy, which has shown a Sharpe of close to 1 since it started in 2011; manager Peter Kisler was previously a profitable proprietary trader at Swiss Re. “We plan to roll out an EM UCITS strategy this summer, which is expected to be quite close to the existing strategy based on conversations with counterparties about synthetically replicating short cash bond positions while maintaining adequate depth of market liquidity,” he says. The preclusion of short cash bonds in UCITS would be the main reason for any slippage.

The macro and EM macro strategies have different return profiles but they share a consistent philosophy and process, research resources, and managers who are Morgan Stanley alumni.


North MaxQ Macro UCITS Fund received The Hedge Fund Journal’s UCITS Hedge award for best performing global macro fund during 2018.

The evolving climate for macro trading 

“2018 was a strong year for both strategies because volatility and fundamental catalysts were driving the repricing of markets,” says co-CIO and Head of Research, Michael Carras. Conversely, the period since 2009 has  generally been sub-par for macro strategies: “the environment has changed for two reasons. Price formation used to be determined by fast money banks and hedge funds, and banks could absorb flows. Now price formation is more set by slower-moving, slow money or ‘real money’, buy and hold investors including index funds and ETFs”.

“Even when dislocations occur, market reaction function times are now much longer and therefore harder to time,” he continues. “Fundamentals still matter eventually, but the catalyst for their recognition is different. It used to be banks and hedge funds shorting an asset. Now, the price only adjusts after a bad outcome has materialised. A good recent example would be emerging markets: problems were apparent in 2016-2017, but prices did not adjust until 2018.” 

The second challenge for macro investors was that, “zero interest rates and QE clearly inflated the price of financial assets and compressed spreads, forcing investors to sell volatility to generate income. This generally reduced the opportunity set for hedge fund investors. That said, the ECB’s well-telegraphed announcement of QE did provide a predictable opportunity to buy up cheap assets,” he reflects. 

“That window has long passed,” declares Kisler. “Now that most assets are fairly priced at best, it is hard to ride momentum and mis-pricings persist for longer. We do not want to swallow the pill and follow momentum as some larger funds did.” 

Carras concludes, “Macro still works, but we need to find the beat of the market and even when you measure the pulse, it’s weak”. 

Multiple strategies, one book 

North strategies differ both from an “old school” macro approach of five or six big themes, and the model of multiple traders or desks running their own independent books (seen in managers such as Brevan Howard). Both of North’s strategies follow a philosophy of having 20-30 strategies, within a single book. A “strategy” is defined as being 75% or less correlated to the rest of the book, and there is a team consensus on sizing positions and risks. 

The two books are now managed by four risk takers: Papamarkakis is lead PM for the core macro fund, Kisler is lead PM for the EM macro fund, and two erstwhile traders at the firm – Naresh Bansal and Zain Iqbal – have now become junior portfolio managers.

The core macro strategy allocates to EM and may have some idea and position overlap with the EM macro strategy. “Yet the correlation between the two strategies has been low – and sometimes even negative – because timing and implementation of trades is different, and the EM strategy has more focus on credit,” explains Carras.

Macro still works, but we need to find the beat of the market and even when you measure the pulse, it’s weak.

Michael Carras, co-CIO and Head of Research

Contrarian research

North has a somewhat contrarian bias, seen most recently in switching to a tactically long stance in December 2018. Different perspectives arise from the fact that some research staff have unconventional backgrounds, such as Armin Popp, who had previously worked at UNIDO. “There is not much value in a typical team,” says Carras. “There is no shortage of economists, strategists and traders keen to give their views, but we need to be able to assess and challenge them on a qualitative and quantitative basis. That is helped by diverse experience. We never lose sight of the forest while looking at the veins on leaves of trees. Popp has helped us to develop new collaborative workflow technologies that scale up the efficiency of our research and regional coverage.”

North’s research process blends quantitative inputs, such as leading, lagging and coincident statistical analysis, with fundamental analysis of politics and regulations, as well as technical considerations such as investor positioning.

Under MiFID II, North now pays for external research separately from execution under an RPA model with a very low expense ratio. Research is bought from banks and some third-party non-bank providers. North works with three prime brokers (Credit Suisse, Citi and Societe Generale Prime Services), and finds them particularly useful for roundtable discussions at conferences. 

Trade types 

North has four broad trade types. The largest allocation is to thematic trades, followed by relative value. The counter-trend sleeve fluctuates in size with the opportunity set, and the smallest bucket, on average, is a purely quantitative strategy (present in the core but not the EM strategy).

Thematic trades look for valuations that are dislocated relative to fundamentals. Relative value trades are more motivated by an expectation of mean reversion and can trade the basis between different instrument types such as swaps and bonds. Countertrend trades also seek reversals of overextended investor positioning.

The purely quantitative trades are based on factor models, using macro, market and technical inputs. North is somewhat unusual in maintaining this suite of systematic strategies within the core fund. “Systematic and algorithmic trading are playing more significant roles now,” observes Carras. The base case is to keep this inside the fund, though North could be open minded about offering it on a standalone basis to interested investors.

Views and trades 

North is active mainly in currencies and fixed income, including sovereign, swap and inflation markets; to a lesser degree in equities, and makes only occasional excursions into commodities. 

North’s big picture macro view in April 2019 was that the path of Fed rates will be data dependent, and it is too early to tell if recession or rate cuts are priced in. “The unwinding of QE in the US contributed to the 2018 correction, but markets bounced back very fast after the Fed pressed the pause button. It would be hard to justify the Fed resuming QE unless risk markets fell a lot, signalling renewed instability,” says Kisler. On Europe, North has been surprised by how much data has weakened, but finds it hard to see ECB rate cuts, or indeed hikes. 

But these rate views are really meta-level in the context of North’s process, which is distinguished by having less emphasis on the G3 macro markets of US, Eurozone and Japan. The manager is of the opinion that smaller markets – which include Scandinavian, Central and Eastern European markets – have more under-informed participants. 

Trade timeframes are medium term: mainly under three months with some lasting longer. For instance, North put on a trade receiving Chinese yuan interest rates between late 2014 and early 2016, based on the expectation that excess capacity and excess credit growth would lead to lower rates. Conversely, over the same period, North was paying rates in Czech koruna versus the Euro and Swedish krona, based on the belief that Czechia’s superior economic performance would lead to higher rates.

In early 2019, North has a bearish trading outlook for Australia’s currency, due to its slowing economy and capital flows. Amongst smaller countries, North accurately anticipated that Norway’s central bank would hike rates in March 2019, as its economy continues to outperform the Eurozone’s.

A relatively large position has been a trade in Turkey that earns high income while hedging currency risk. “The market is pricing in a lot of rate cuts as inflation falls, but we expect less than the market consensus,” says Kisler. 

These few examples illustrate a small subset of the repertoire. Attribution breakdowns shared with investors show that performance attribution has been broadly spread across geographies, asset classes, instrument types, and trade types: (North MaxQ Macro UCITS Fund performance in 2018 had 15 strategies which gained between 50-200bps and 7 strategies which lost between 50bps and 200bps).

Yet there are limits to the investment universe as some markets would not meet the firm’s liquidity criteria. “We primarily trade liquid markets where there are prices to trade and we could liquidate positions in a matter of days,” says Carras. “So long as the liquidity profile of positions is aligned with that of the fund, the EM fund has somewhat more potential to have more illiquid positions, and providing liquidity has some value,” points out Kisler. “The constraint is managing position sizing so that mark to market and margin requirements can be handled.”

A recent example of a market that has gone off limits for liquidity reasons is Venezuelan bonds, which have become effectively frozen owing to sanctions. When and if they resume trading, Kisler could contemplate wading in, but would be very mindful of concentration risk.

Larger versus smaller macro funds

North’s style of management has remained consistent as firm assets have twice made a round trip from over one billion to under 200 million USD. The first time around, North was used as an ATM after the 2008 crisis, despite good performance. The second wave of outflows did coincide with a performance drawdown. Asset raising has made use of prime broker capital introductions and “we have used third party marketers with varying degrees of success,” says Carras.

The team has been largely stable throughout the gyrations in assets. “There was a small natural reduction in the investment team and some consolidation of IT and operational functions. We have a robust infrastructure so we could manage more assets without increasing the headcount significantly,” he continues.

The manager’s distinctive style of macro trading has endured through the swings of assets and differs from giant macro funds in at least two ways: “we cannot afford the cost of legal fees that could be entailed in some workout, restructuring and distressed situations. And we will generally not get allocations to private placements, such as a recent issue of Ukrainian sovereign debt – nor be sounded out on the pricing of such deals, however being a smaller size allows us to be nimble and gives us ample liquidity in the market,” says Kisler. 

North has some things in common with larger managers however, having been a signatory of the Standards Board for Alternative Investments (SBAI) – formerly called the Hedge Fund Standards Board (HFSB) – since 2011. This may be a comfort factor for some investors, but, “we did not need to make any changes after signing up, and in some areas our processes are potentially ahead of the standards,” declares Carras.

Trade construction

Though North has high conviction views, their shorter to medium term trading savvy is also important. Kisler has been short-biased amid rallying markets, but still delivered positive returns even when this fundamental view did not play out. This is partly due to the diversity of alpha sources and also down to trading around positions: “we view trade implementation and managing positions as being almost as much work as fundamental research and idea generation,” says Carras.

North uses a wide suite of instruments: futures, forwards, options, swaps, plain vanilla options and exotic options, which can be exchange-traded or are more likely to be OTC for currencies; structured products are avoided. OTC instruments are cleared where possible, though Kisler finds margin rates prohibitive for single name CDS. Clearing mitigates counterparty risk, which is anyway diversified under UCITS rules.

The fund’s return profile has a somewhat long volatility pattern, which is sometimes expressed explicitly via owning options, or trading volatility, but can also be achieved through other instruments – such as being short of credit spreads by owning credit default swaps (CDS) – which has a similar payoff profile of defined downside and potential upside many times greater. But North is not dogmatic about owning option-like instruments. “We mainly have options when volatility is mispriced and do not want to pay too much for them when it is expensive. Then a different trade expression can give a better, asymmetric payoff,” explains Carras. For instance, North can structure certain curve trades that combine short exposure with positive carry and roll yields; or others that blend long exposure with hedged credit risk. North is seldom long of the carry trade as such at the portfolio level, but may be for individual strategies, particularly where positive carry is married with a short stance.

There is no shortage of economists, strategists and traders keen to give their views, but we need to be able to assess and challenge them on a qualitative and quantitative basis.

Michael Carras, co-CIO and Head of Research

Risk management

The Chief Risk Officer (CRO) function has always been independent and is currently held by Annabel Littlewood. “One of the challenges for a risk manager is to keep trying to improve and add to our risk metrics, while avoiding introducing overbearing and unimaginative additional measures, which may reduce the ability to take the asymmetric risk that we want,” she says.

North has built its own risk management systems. “This allows flexibility to add risk measures or to focus on certain elements of a trade and this is a valuable resource for a risk manager. As an example, we have some additional tailor-made credit risk metrics and cash monitoring tools for the EM Fund,” she adds.

Carras explains: “we have used off the shelf systems in the past, but always found a lack of transparency in what they were doing. The way trades were structured, grouped and analysed, was not necessarily ideal. I helped to develop and build our in-house systems with full transparency and control to understand the risks, scenarios and simulations in the way we wanted.”

North’s stress tests can consider multiple standard deviation moves, various risk factors, and composite moves in markets to look at correlation risk. There are also hypothetical stress tests

including bespoke and ad hoc scenario analysis around events and themes. 

There are various risk limits including position, strategy and portfolio level stop losses and drawdown levels, tailored to individual strategies: “it is okay to be wrong and have negative mark to market amid strong conviction, while awaiting catalysts, so long as risks and position sizes are managed appropriately,” says Carras.

 Correlation and concentration ceilings are monitored weekly and there are caps on name, country and asset class exposures. “Concentrated VaR is not perfect but is an easy and consistent metric to use,” says Carras. “The EM fund pays more attention to credit risk, looking at multiple jump to default scenarios,” adds Kisler. “The process is fluid and the emerging market fund has reduced its volatility since inception, with additional diversification from 2015 designed to improve the Sharpe ratio. This has not reduced returns,” he adds.

The UCITS has a Value at Risk (VaR) limit rather than the leverage limit that can apply to certain types of UCITS. Its gross exposure was around 600% in March 2019, but Carras questions the value of regulatory reporting of leverage: “It is not a good guide to systemic risk. It disregards the tenor of maturities and on derivatives it is nonsensical. The vast majority of our leverage comes from short term interest rates or swaps, where the notional exposure is disproportionate to the risk.” 

Indeed, quantitative metrics in general have their limits: “to my mind, there is no substitute for a face to face risk meeting as a forum for a robust discussion about every strategy in the portfolio,” says Littlewood. “We have our Risk Meetings every week with Portfolio Managers, the Research group and Risk officers. PMs present new trades, research also provide detailed analysis on macro elements and as a risk manager I can understand the high-level picture, but also really go into the detail at this meeting. This is also another advantage of being a smaller operation, we can have these meetings and share ideas and opinions on a regular basis which in turn creates a positive environment where everyone can have their say.” Carras concurs: “it is really interesting to have a CRO who can challenge us on the rationale for each strategy in face to face discussions and ask useful questions”. 


North feel that the opportunity set remains better in EM macro, where there are more participants, and asymmetries of information and incentives than in developed markets. EM clearly has a larger number of currencies and interest rates to trade, and interest rate cycles show lower correlations than those in developed markets. 

Kisler feels a sense of 2007 déjà vu, given the yield curve shape, but equally admits it is hard to time the denouement he expects. But Kisler is always nimble and flexible in his approach. He has moved from a long bias in 2015-2016, to a short bias in 2017-2018. He then tactically covered between half and two thirds of shorts in late 2018 – but may look to rebuild them if markets strengthen. He judges that, “valuations bouncing back to mid-2018 levels are balancing out slower global growth against a more dovish Fed, but we do expect another correction, perhaps in 2019 or 2020”. 

“Corporate credit could be the epicentre of the next crisis, as companies have taken on so much debt, which will be harder to repay once defaults occur. We reckon a global slowdown could be enough to push some companies into defaults,” says Carras.

Kisler has, “given up predicting inflation, but a wild card scenario could be the return of inflation, which would render QE ineffective”.

While shifting his directional biases, Kisler has constantly been trading different markets and countries from both sides, including some relative value trades. Critically he keeps a close eye on elections in emerging market countries such as Argentina, Ukraine and Turkey. He stands ready to ramp up short exposure at some stage.