After a 30-year career culminating in CEO and senior leadership positions for banks and technology companies with billions of revenues and thousands of employees, in 2018 Ian Russell resolved to become a portfolio person: authoring books, giving speeches, and acting as an angel investor in early-stage smaller private companies using his acumen for turnarounds or scale ups. He chairs five boards, but only one investment related firm has thus far piqued his interest: Swarm Technology, which developed the Swarm XVI strategy that has garnered multiple awards including The Hedge Fund Journal’s CTA and Discretionary Trader performance awards, where the The Swarm XVI™ program’s 2021 performance earned it the Best Performing Fund in 2021 in the AI Multi-Asset Strategy (AUM < $100m) category, and the firm also featured in our Tomorrow’s Titans report on rising star hedge fund managers. Swarm is distinguished by an utterly uncorrelated return profile: it has shown no correlation to trend following CTAs, other systematic strategies, conventional asset classes or illiquid alternatives such as real estate and private equity.
I decided I liked the investment strategy so much I wanted a stake in the company. I offered to seed the program – but only if I could also get involved in the business.
Ian Russell, Swarm Technology
Russell recalls the eureka moment when he heard the Swarm story: “I was intrigued by how Pan Yiannakou and Charlie Drew pitched their differentiated interpretation of financial markets at a time when I struggled to find much genuine innovation in investment. Pan peeled back the layers, I went through the data and backtest, and determined that the systematic and scientific approach made sense. I had seen the principle of Swarm intelligence in computing before. I had a ‘Remington moment’ and decided I liked the investment strategy so much I wanted a stake in the company. I offered to seed the program – but only if I could also get involved in the business”.
Russell relishes the challenge of growing new businesses, and it took nearly a year to get everything up and running in terms of offices, systems, cash management, outsourced compliance and live trading, before the strategy launched in July 2019. He found that the entrepreneurial mindset and setup expedited decision making: “In a small business we can gather round the table and make decisions quickly without the need for the bureaucracy of larger businesses”.
CFO Russell finds that he, CEO Yiannakou and COO Drew have very different and complementary skillsets: Drew has the expertise in the underlying science, such as biomimicry applications including turbine blades modelled on humpback whale fin and Yiannakou is an industry veteran, previously running up to USD 2.5 billion in managed futures as part of Man Group’s associated manager program starting in the late 1990s.
Russell’s knowledge of technology – he was global Chief Information Officer for Barclays Bank – has been brought to bear on operational matters such as business continuity and disaster recovery, though he has not got involved in the front-end coding of the trading models and signals.
Russell has pursued his passion for building the brand, in terms of the “awareness, engagement, conversion” funnel sequence beloved of business school professors, as well as aesthetic nuances such as the distinctive ant logo and imagery: “We have a clean elegant brand. Swarm was a new entrant into a very interesting but congested niche industry space. We wanted to create a narrative around the brand and a reason to talk. This was an intellectual challenge that Charlie and I worked on”. Whereas AI aims to mimic human intelligence, the Swarm system assumes that ants’ intelligence, while individually much less sophisticated than human intelligence, could be collectively more useful for trading.
Most new hedge funds will not survive 5 or 6 years and may see false starts and setbacks along the way. Russell observes that, “It takes time to get any new company known in a marketplace and to generate momentum. But after 5 years in business, we have the momentum and traction that we need and assets are growing as is interest in the product range through several access routes. There are several family office investors as well as institutions.
Swarm has expanded from its original trio, including the key hire of Sarah Manno as the VP of Strategy and Operations.
The Swarm matrix employs seven million calculations per day to build 260,000 connections amongst the 16 markets traded.
As an investor in the firm, Russell appreciates the value of a steadier earnings stream, which can come from a more diversified investor base. Therefore, he has been keen to broaden distribution channels, geographically and by platforms and vehicle types. Two thirds of assets currently come from the US, and Swarm will be looking at the Middle East and Asia Pacific. “We apply old fashioned rigour and discipline to pipeline management for the CRM, and are actively seeking new connections and opportunities in the marketplace.”
Rcube Asset Management, Swarm’s regulatory host and a Paris-based multi manager platform, can accommodate managed accounts with a minimum ticket of USD 4 million. Swarm already has multiple managed accounts and is onboarding more over the coming months. Meanwhile, a Cayman fund on the Galaxy Plus platform has just gone live, with a minimum ticket of USD 250k. The standard risk level is a 15% annual volatility target but investors in managed accounts can dial up to as high as 2.5x this or 37.5%.
The partnerships with Rcube and Galaxy were meetings of minds on both sides. Rcube Asset Management SAS was selected to run the managed accounts after referrals and extensive due diligence, and the team made a good choice: “We work very closely together with them,” says Yiannakou. Cyril Castelli, CEO of Rcube, selected Swarm because of the “strength of its risk adjusted returns and the highly diversifying alpha it brings to investors since inception in 2019”. He is also invested in the Swarm strategy through the Rcube Multi Strategy fund.
Galaxy Plus, a Chicago based managed account platform with assets over USD 2.5 billion, was also chosen after much due diligence, recommendations and research. Marc Lorin, who is Chief Investment Officer of New Hyde Park Alternative Funds LLC, which launched Swarm on Galaxy Plus, is excited to have Swarm on the platform, saying: “The unique signal generation of the Rcube Swarm trading program and technology, inspired by decision making in ant colonies, results in a return stream that is differentiated from most managed futures trading programs”. Galaxy is now home to an eclectic and expertly curated mix of over 30 managers, some of whom have featured in The Hedge Fund Journal.
Russell also views Swarm through an investor lens. As an investor in the Swarm strategy, Russell keeps a close eye on investor relations and communications. They include fairly industry standard newsletters and tear sheets, as well as more distinctive editorials and viewpoints on market action which could be written by Yiannakou, Drew or Russell. There is also an annual review, That Was the Year that Was, identifying key trades. In 2023 the fund experienced its largest drawdown, which Russell used as an opportunity to somewhat size up his investment in the business: “I drink my own champagne and take my own medicine,” he quips.
We find opportunities and signals that are ‘hidden’ in the hundreds of thousands of connections we monitor.
Pan Yiannakou, Swarm Technology
Research into a risk management upgrade inspired by changing patterns of market behaviour was enacted this year, and has enhanced risk adjusted returns.
The RM+ refinement was implemented at half risk in April 2023 and fully rolled out in May 2023. Over the six months to October 2023, the Sharpe ratio has been annualizing at a gross Sharpe of 2.9, well above its long run target of 1.15 (which is based purely on trading profits, not including interest on cash).
Yiannakou is anxious to stress that RM+ is not actually designed to increase returns, and says, “If we wanted to optimize for returns, we could get a simulation Sharpe of 5 based on market specific models. But my 30 years of experience in building systems has taught me not to overparameterize and overfit”. The information content of the Swarm matrix models will fluctuate with factors such as the level of market volatility, which was helpful in both 2021 and 2023. The “hit rate” has increased from 60% to 69% since RM+ was implemented.
RM+ is designed to shorten average holding periods, because analysis showed that most profits had come in the early part of a trade’s life. It has reduced average holding periods from 24 to 14 days, with holding periods defined as a position in a market in the same direction.
RM+ is also intended to avoid single market return outliers in either direction. In simple terms it has a symmetrical stop loss/take profit target, typically around 2%, and will most often result in the systems taking profits earlier than otherwise. (RM+ also has more nuanced influences on volatility and performance that are proprietary in nature.)
It can also provide another way to cut or reduce a losing position independently of the rest of the book. Hitherto, the models could only reduce overall portfolio risk, in increments of 25%, and this remains in place, “though RM+ is expected to reduce the need for portfolio level mechanical de-gearing,” says Yiannakou.
Swarm now has four potential layers of risk management. All four are systematic: RM+ for individual markets, portfolio level de-gearing and regular position adjustments. Two have a discretionary element which are rarely triggered: risk could be reduced if markets became dysfunctional (such as negative oil prices after Covid in April 2020), or more often on an intraday basis in anticipation of a stop being imminently hit.
Notwithstanding the scope to reduce individual positions independently, the objective to equalize dollar risk per market traded over a 34-day lookback remains intact. Swarm are of the opinion that second guessing winners and weightings within their investment universe could be “overfitting”.
Since RM+ kicked in in May 2023, the program has substantially undershot its volatility target. The reasons are partly the RM+ upgrade, and also one feature that is quite typical of CTAs: Swarm sizes positions inversely to market volatility.
Apart from volatility scaling, Swarm is very atypical of a CTA.
Though a proprietary medium term trend system is the starting point, later modified by the Swarm matrix, the Swarm strategy does not correlate to trend followers. The strategy has continued to show low correlation to any other asset class or strategy, equities, bonds and illiquids such as real estate or private equity. This is as expected: “We find opportunities and signals that are ‘hidden’ in the hundreds of thousands of connections we monitor,” says Yiannakou. The Swarm matrix employs seven million calculations per day to build 260,000 connections amongst the 16 markets traded.
These insights may not be so obvious to other managers who have a more siloed framework analysing each market in isolation. The cross-market connections enrich the understanding of interconnected and interrelated markets.
On one level the strategy has historically been trend, dormant or countertrend in equal proportions, but this is somewhat arbitrary, because whether a market is defined as trending or reversing can sometimes depend on the lookback period. In any case, the strategy does not seek trend or countertrend per se, rather it goes for statistical edge.
In the fourth quarter of 2023, US interest rate expectations have gyrated from fears of more rate rises to consensus expectations of multiple rate cuts in 2024. Meanwhile the Israel/Gaza war and escalating regional tensions add to uncertainties over EU and US support for Ukraine.
Amid increasing uncertainty around the macroeconomic and geopolitical outlook, Swarm is finding its opportunity set has been enriched by greater volatility injecting more information into prices. Investors who are sitting on substantial cash reserves and who are not confident enough to make a bold call on asset classes or market direction could benefit from an opportunistic trading approach, which has also acted as a powerful diversifier for both traditional and alternative portfolios.