Singapore Hedge Funds Club
5 Sep 2017
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8 Nov 2017
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1 Dec 2017
17 Aug 2017
According to Eurekahedge: As of July 2017 year-to-date, Asian funds have recorded a growth in AUM of...
29 Jul 2017
Värde Partners, the distressed debt and buyout-focused fund manager, has hired Bank of America Merri...
25 Jun 2017
According to Eurekahedge: as of May 2017 year-to-date, Asian funds have recorded a growth in AUM of ...
29 May 2017
Yuan Wang has become a partner in charge of investor relations at Hong Kong-based Dantai Capital, a ...
22 May 2017
According to Eurekahedge, at the end of April, year-to-date Asia ex-Japan managers were up 7.12% wit...
2 May 2017
One interesting and seemingly growing trend in the Asian hedge fund industry is the flow of experien...
Maybank Kim Eng的Ade Olopade 艾德歐羅帕迪 (Chinese version)
11 May 2017
Maybank Kim Eng’s Ade Olopade on the changing prime brokerage business
24 Apr 2017
Clayton Heijman of Privium RKR on barriers to entry and institutional set-ups
1 Apr 2017
Mohammed Ali-Reda of Darkhorse Capital discusses his equity long/short strategy
7 Mar 2017
- Maybank Kim Eng的Ade Olopade 艾德歐羅帕迪 (Chinese version)
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Shout It Out Loud
Hedge fund industry interviews
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Maybank Kim Eng的Ade Olopade 艾德歐羅帕迪
國際大宗經紀行業在過去的十年中發生了重大變化。對沖基金會所（Hedge Funds Club）的Stefan Nilsson最近與Maybank Kim Eng的大宗經紀服務區域主管Ade Olopade就此談話。
告訴我們關於Maybank Kim Eng的大宗經紀服務
Maybank Kim Eng為新興的對沖基金經理，中小型對沖基金，家族辦公室和管理帳戶平台提供多市場，多資產的主要服務平台。作為一個精品經紀商，Maybank Kim Eng提供了超過40個可交易市場的渠道來交易傳統股票（最近的市場是新加坡和最遠的市場是墨西哥），交易所交易的衍生品以及合成股票和期權。我們的產品服務保證新興經理通過我們的信用中間人策略繼續獲得交易額度和融資。此外，作為可能是東南亞唯一的屬於銀行的大宗經紀服務平台，我們向對沖基金客戶對現金管理解決方案的要求提供支持。從交易解決方案的角度來看，我們的交易基礎設施保證了我們對各種交易平台的兼容性，因為我們提供多個選項可確保市場連接（如FIX、API和智能集線器連接）。從服務支持的角度，我們在新加坡和倫敦經營兩個經驗豐富的大宗經紀服務團隊。
我想一個關鍵的區別在於我們Maybank是以人為本的金融服務公司。這意味著我們理解客戶的起步階段，讓我們的金融服務渠道通過與人接觸達成。由於“巴塞爾公約”III對資產負債表的分配和使用的影響，相關度量比如風險加權資產，槓桿率，歸屬股東權益，成為了投行關閉中小型賬戶的主題詞。 Maybank KimEng的精品經紀解決方案建立在集合概念。確保聚集小中型賬戶的交易規模，增強議價能力，中小型賬戶可避免與投行直接開戶產生的高昂的用以維持使用投行資產負債表的最低收入標準。
Maybank Kim Eng作為東盟經紀商在機構和零售方面都有強大的網絡。這意味著我們擁有一個潛在客戶都很熟悉的品牌，並且這是我們可以繼續打造的品牌。從交易對手風險的角度，我們大宗經紀服務作為馬來亞銀行集團成員，使客戶對於我們更有信心。我們大宗經紀業務在2014年底開始，有人會說，我們是進入這個行業相對較新的公司。不管怎樣，在過去的三年裡，我們的大宗經紀業務的增長呈現出我們的野心。我們的目標是積極擴大我們在對沖基金行業的業務。對沖基金行業作為一個整體，是一個依賴關係的行業。基金和他們的服務提供商的個人之間的溝通非常重要。溝通既讓我們了解客戶的需求和也讓我們向客戶展示我們的能力，並告知新的前景。除了與基金經理直接打交道，我們與其他行業參與者保持友好關係，這有助於促進更多的介紹。至於我們在亞洲其他地方的商業目標，香港在亞洲擁有最多對沖基金，對我們來說是一個非常重要的市場。日本是另一個我們關注的市場，但由於其複雜性和文化的細微差別，你需要一個更適合的策略。為了得到更好的感知日本的契機，我們採取的一種方法是利用有針對性的對沖基金為中心的活動，而不是傳統的企業客戶的會議。傳統企業會議有這種內在的渴望吸引更廣大的受眾，因此失去了自下而上的角度，而這種角度對沖基金的專業人士非常重要。像對沖基金會所（Hedge Funds Club）這樣的活動為對沖基金專業人士會面，分享想法提供平台，是非常理想的，更為直接和有效的方法。
你在2013加入Maybank Kim Eng之前是做什麼的？
在Maybank Kim Eng之前，我在新加坡MF Global， Cantor Fitzgerald，Kim Eng Securities工作過。我的工作主要集中在為零售和機構客戶提供差價合約產品。在從事金融服務之前，我曾在倫敦Marubeni的可再生能源部門做項目融資。
The international prime brokerage industry has seen major changes happening in the past decade. HFC’s Stefan Nilsson recently had a chat with Ade Olopade, Regional Head of Prime Services with Maybank Kim Eng Securities in Singapore.
Tell us about Maybank Kim Eng’s prime brokerage services.
Maybank Kim Eng offers a multi-market, multi-asset prime services platform to emerging hedge fund managers, small-medium sized hedge funds, family offices and managed account platforms. As a boutique prime broker, Maybank Kim Eng’s offering provides access to more than 40 executable markets on both cash (nearest market being Singapore and furthest market being Mexico), exchange-traded derivatives as well as synthetic equities and options. Our offering ensures emerging managers have continued access to credit through our credit intermediation strategies. Additionally as probably the only bank-backed prime service platform in South East Asia, we offer cash management solutions to support the banking requirements of our hedge fund clients if so required. From a trading solutions perspective, our trading infrastructure ensures that we are agnostic to trading platforms given the multiple options available to ensure market connectivity (e.g. FIX, API and smart hub connections). From a service support perspective, we run two experienced prime services teams out of our Singapore and London offices.
How do you differ from the bulge-bracket prime brokers?
I guess a key differentiator for us lies in the vision of the House of Maybank which is humanising financial services. This means that we understand the days of little beginnings and putting a human face to how financial services are accessed. And as Basel III takes its toll on the allocation and use of the balance sheet, metrics like risk-weighted assets, leverage ratio denominator, and attributed equity become thematically important buzzwords for off-boarding small and medium-sized managers. Maybank Kim Eng’s boutique prime brokerage solution rests on the concept of aggregation. Aggregation ensures that small- and medium-sized managers benefit from collective bargaining power to overcome the prohibitive minimum revenue hurdles necessary to retain access to “balance sheet” if they had tried to individually on-board directly with a bulge-bracket prime broker.
Is it viable for you to service smaller and newer hedge funds in Asia?
Hedge funds in Asia have historically been smaller in terms of assets under management compared with those in the US or Europe. Comparatively, even the smaller hedge funds are smaller than their US or Europe counterparts. Asia has a large number of boutique funds that need access to prime services but increased capital requirements within the bulge-bracket investment banks have meant that these funds and their managers are being overlooked. Our aggregation model provides economies of scale which allow us to service smaller funds whilst remaining competitive in the market. Although we work with some more established managers, the majority our clients oversee less than $100m in assets. Notwithstanding, we are comfortable working with those managing a modest portfolio of $5m-$10m.
You are a well-established and known broker in South East Asia. What are you doing to target business in other parts of Asia, such as Hong Kong and Tokyo?
Maybank Kim Eng has a strong pedigree as an ASEAN broker-dealer franchise in both institutional and retail equities. This is helpful as it means that we have a brand that potential clients are familiar with and one that we can build on. From a counterparty risk perspective, being a member of the Maybank Group provides assurance to our clients as to the strength of our boutique prime services franchise. With the commencement of our prime services business in late 2014, one would say that we are still relatively new entrants to this space. Regardless, the growth of our prime services franchise in the last three years has shown our ambitions and it is our intention to be very active in expanding our relationships within the hedge fund sector. The hedge fund sector as a whole is very much a relationship-based business where regular communication between funds and their service providers and personal interaction are key to both learning about the needs of clients and informing new prospects of our capabilities. In addition to direct dealings with fund managers, we maintain friendly relationships with other industry participants and this helps to facilitate meaningful introductions. As to how we intend to target business in other parts of Asia, Hong Kong for us is a very important market, home to the largest number of hedge managers in the region. Japan is another market that we have our eye on but given its intricacies and cultural nuances, one that requires a more tailored strategy. To give us a better sensing of Japan as an opportunity, one approach we seek to adopt is to leverage on targeted hedge fund centric events instead of the traditional corporate conferences that are not tailored to the specific requirements that hedge funds. Traditional conferences have this inherent desire to appeal to a wider audience consequently losing the bottom-up perspectives that hedge fund professionals see as more pressing. Events such as the Hedge Funds Club provide a specific forum for hedge fund professionals to meet and share ideas are ideal as they allow for a more direct and efficient approach.
What kind of presence does your PB team have in Asia?
Our PB team is headed out of Singapore and this provides us with a cost-effective platform to reach out to both our core regional markets in ASEAN as well as North Asia. Be that as it may, we also have an office in Hong Kong and this allows us a platform from which to actively engage the local hedge fund community. Having a presence in both countries places us in a strong position as these two markets make up a large share of the hedge funds in Asia.
How do you view the future of the Asian hedge fund industry?
Increased costs and pressure on fees are driving a lot of changes, not just in the hedge fund industry but in active investment management in general. The flow of money into passive strategies with low fee structures has forced active managers to re-think their business models. In the hedge fund space, managers have been looking at new and more flexible cost structures. This is particularly true for smaller managers where attracting capital can be very challenging. The increased cost of doing business, particularly with regard to regulation and compliance, has added further pressure. This is naturally felt more acutely by smaller managers, many of which have responded by pooling resources where possible, e.g. bundling themselves onto fund manager platforms to avail themselves of the shared benefits of reduced compliance cost, operation support etc. Structured solutions such as actively managed certificates offer benefits to managers who want to forego the cost of establishing a fully fledged fund entity. We expect these trends to continue as managers look to lower their fixed costs, particularly in the start-up phase, and to offer more competitive terms to attract new capital. From a markets standpoint, China is an area of particular interest as it offers tremendous potential both in terms of the development of the local investment management industry and as a source of investor capital. The hedge fund industry in China is still in the early stages of development but recent signals from the Chinese authorities indicate that they are interested in fostering its development under a more clearly defined regulatory framework.
You joined Maybank King Eng in 2013. What did you do before that?
Before Maybank Kim Eng, I worked at Cantor Fitzgerald Singapore, MF Global Singapore and Kim Eng Securities Singapore. My time was spent primarily in the Contracts For Differences space for both retail and institutional clients. Prior to the financial markets, I worked with Marubeni in London doing project finance for the renewable energy sector.
If you hadn’t worked in finance, what would you have been doing?
Interestingly, if I were not working in finance, I would be in the budget airline business in Africa – something that I find rather ironic given I am not an avid traveller. From an African perspective, the lack of adequate travel connectivity and the cost of inefficient national carriers has been a major crippling factor in the growth of the tourism sector. I believe the aviation sector in Africa should be privately led. Air Asia as an example is reflective of the power that aviation has in energising tourism markets given how it has opened up ASEAN.
Privium RKR is fast growing its Asian business by providing investment teams with an institutional infrastructure right from the start. HFC’s Stefan Nilsson had a chat with industry veteran Clayton Heijman about Privium RKR’s business.
Tell us about Privium RKR’s services for fund managers and investors?
Since 2008 the final industry has seen an increase in regulations, compliance and checks. At the same time investors have started to conduct more due diligence on infrastructure and potential risks while applying pressure on management fees. We are also seeing regulators worldwide implementing more rules for the asset management industry. As a result of these developments, the barrier to entry for new asset management initiatives is increasing. The full scope of services that we are offering provides portfolio managers an institutional infrastructure that will allow them to be set up with a limited investment and full transparency. At the same time, it is scaleable for growth and globalisation.
How did the two firms Privium Funds and RKR Capital come together in this Asian venture?
Privium had developed a business in Europe with an AUM of over US$1.5 billion and offices in London, Luxembourg and Amsterdam. Our ambition is to grow our business also into Asia met with the regional expertise of RKR Capital. These conversations resulted in a strong combination that was welcomed by the market.
Where are you currently at with your Asian business and what are you trying to achieve?
We already knew that there was a desire from portfolio management teams to work with a global player. However the response has exceeded our expectations. The positive responses came both from international managers that want to grow, again, in Asia as well as Asian managers locally. All are reviewing the benefits we provide them. We have a very compelling business case for them. Privium RKR can help them to set up a solid infrastructure and provide access to various service providers and markets. Asian portfolio managers should want to set up their funds allowing them to reach investors across the globe. With our global coverage we can help them to achieve these goals.
What kind of funds do you currently have on your platform in Asia? Can you give us some examples?
We have seen a lot of new initiatives over the last 12 months. This is an encouraging signal for the overall asset management industry. The teams managing private equity and venture capital are experiencing new regulation for their activities. In addition there are several funds starting with an equity long/short strategy, a quantitative strategy and a macro strategy. We have also seen traditional long-only managers and there is also a renewed interest for funds of funds. As for the location of the activities we obviously review initiatives that have a link to mainland China but basically see initiatives all over the Asian region.
You have chosen Hong Kong as your Asian headquarters and recruited an experienced team to manage it. Was Hong Kong an obvious choice?
Hong Kong has long played a role as a large asset management hub in the Asian region. The decision for a Hong Kong location was further strengthened due to the longstanding history that many people in our firm had with Hong Kong. For me personally it felt like I was coming home.
You personally have a solid background in alternative investments. Tell us about what you have done before you set up Privium and what led you to set up the business.
The set-up of this business has only been possible because of the different previous roles and experiences I had. Learning the ins and outs of the fund industry by working, amongst others, in the prime brokerage and equity finance group of Goldman Sachs in Asia, Europe and the US, having experience in fund operations at MeesPierson and setting up investment vehicles at Fortis. These experiences were all essential in Privium RKR becoming the single point of contact to discuss different matters for teams that want to set up or expand their asset management initiative. Our global team has a broad experience in the different areas of the asset management industry.
If you hadn’t been working in the fund management industry, what do you think you would have been doing?
Exploring and supporting new initiatives is part of my DNA. As a result I am a big fan of Sir David Attenborough and his work. My alternative career would probably have been accompanying him on his travels across the globe and unravelling the mysteries of nature.
Three years ago, Mohammed Ali-Reda founded Darkhorse Capital in Hong Kong to manage his own bottom-up emerging Asia and Middle East and North Africa equity long/short strategy. HFC’s Stefan Nilsson decided to have a chat with him about this journey so far.
You manage an equity long/short investment strategy focused on Asia as well as the Middle East and North Africa. What can you tell us about it?
Our strategy focuses on identifying quality companies that are run by honest and capable management who value shareholder creation. We look to capitalise on discrepancies between perceived value and underlying fundamental value of a company by adopting a rigorous and disciplined bottom-up research process. Our focus is on protecting capital while maintaining a sustainable long-term return profile. The portfolio is concentrated and will typically hold around 15 positions and currently has an estimated return on invested capital of 40%. In addition, virtually all my personal net worth is invested in the fund and I view all my investors as true partners in the fund.
What’s your edge? What sets you and your fund apart from the pack?
We focus on a business’ long term prospects, concentrate our holdings and focus on high-quality companies and management teams. This approach means we are able to delve deeper into a company versus a fund that has a shorter holding period. In essence we are looking to maximise the return on time invested for each position that we own and our target holding period is five years. Our investable universe is focused on companies between $500m and $10bn in market cap, with a preference towards ~$1bn range where there is little or no analyst coverage. This allows for us to really conduct differentiated primary research and unique view on the stock. We spend a lot of time on the ground talking to companies, suppliers, industry experts, regulators, other investors, etc. to help form that view – as an example I took over 40 flights last year. We are extremely focused in various sectors such as consumer, specialised manufacturing and specialised financial companies and our focus on the industry value chain provides a better understanding of the industry and competitive dynamics. I’ve spent a decade investing in Asia and most of my career looking at consumer companies. When you look at the world through the lens of trade and business as opposed to what the MSCI and other indexes outline, you find that the Asian and Middle East regions are very interconnected and show signs of further integration. In addition, the development of the capital markets and certain industries are following similar paths as they move from frontier to emerging to developed markets. We believe that ignoring benchmarks while focusing and analyzing companies using this approach provides us with a differentiated view and edge.
What can you tell us about your career prior to launching Darkhorse in 2014?
Prior to Darkhorse I was managing money for Asiya Investments in Hong Kong as Head of Consumer for the group, where I ran various portfolios that consistently generated alpha. I had joined the firm in early 2007 as the third member of the investment team and helped build out the firm. During that time the Kuwait government wanted to provide a way for the public to invest in Asia’s future, instead of opening another office for the sovereign wealth fund, Kuwait Investment Authority, in China. So the KIA and a few other institutions along with the public capitalised the firm. That’s how I got started and focused my career on Asia. Before that I was managing propriety capital for a large bank in Kuwait where we had a global mandate. Over the years I have also been actively involved with the CFA Society. I was a board member and treasurer of the Kuwait chapter.
You have launched your fund on the OPIM platform. Why did you choose to work with OPIM?
I found the OPIM platform was more focused on making sure all the middle and back office functions were taken care of by capable team members and systems. This allows me to focus on the portfolio and investing. The onboarding process was simple and having other mangers around also makes setting up the business part of the fund easier as you can talk to them about any questions, etc. Recently they have been helping a lot more on capital introduction and getting us in front of investors. I also like the people I work with, which is a big plus.
Why did you launch the fund with Hong Kong as a base?
Hong Kong geographically is situated well within Asia with a best-in-class airport infrastructure. Most cities are within a three-hour flight and a flight to Dubai is now around six-seven hours, so traveling is easier than if I lived in another city. The regulatory landscape in Hong Kong is very efficient and recognised globally, which is very important at a time when regulation is becoming more stringent. I also love the food and culture in Asia so I enjoy living here.
If you hadn’t been a fund manager, what would you have been doing?
Growing up I had started a few small businesses, the earliest already in middle school, so I always thought I would be an entrepreneur. I looked up to many successful entrepreneurs and read all their biographies. The notion of running my own business was very appealing to me. In a way I consider running a fund as an entrepreneurial venture within the financial services industry. On top of that, I get to be a part owner in many great companies through our investments as opposed to managing only one which can be a lot more interesting.
HFC’s Stefan Nilsson decided to have a chat with Scott Treloar about Noviscient, the Singapore-based investment company he founded in 2016. Treloar has a solid background working in hedge funds, private equity and banking, where he has primarily worked on portfolio management and risk management, much of it focused on quantitative analysis and systematic trading strategies. “At Noviscient we offer something new and better” says Treloar.
Firstly, can you tell us about Noviscient and what you are trying to achieve?
Noviscient is a next generation investment manager. We are based in Singapore, but work with partners from around the world. We are aspiring to become a trusted partner of our investors by offering alignment, performance and transparency. Our first product is a dynamically allocated portfolio of systematic trading strategies called Liquid Systematic Trading.
Last year was the worst year for hedge fund start-ups and closures since 2008. Why are you are starting a fund now?
As it happens, we think now is the perfect time for us to start Noviscient. We see three big themes impacting investment management and we aim to take advantage of all three.
1) Technology wave – Cloud computing, big data and machine learning are driving fundamental change in all businesses. Investment management, as a pure information processing business, is particularly affected. These technologies are changing the basis of competition. Alpha no longer comes from privileged access to information, but rather from finding new sources of information and then using non-standard approaches for analysis and prediction. Smart use of modern technologies also enables companies dramatically lower their cost of doing business.
2) Partnering over employment – We also see great change in how people work. The gig economy, where people want to partner and consult rather than become employees, has been on the rise for several years now. It enables new and more flexible ways for companies to access the best global talent. We see many prospective traders and portfolio managers looking for new ways to offer their skills and work together.
3) Alignment of interests – Investors are frustrated with the current situation. Investors see that outsourcing their investment requirements to managers is expensive and producing lacklustre outcomes. There is a sense that investment managers are focused on building assets to increase management fees rather than on generating out-performance. They are losing faith in their investment managers and pulling out their money at an increasing rate. For want of better alternatives, this money is going to passive managers.
In summary, the traditional model of active management is coming to an end. At Noviscient we offer something new and better.
So, if the traditional model of active management is broken, how can Noviscient help investors?
At Noviscient we are building a new and innovative business model that acknowledges and addresses these three themes of technology, partnering and alignment. Our business model is a coherent system that creates value for our investing partners while being difficult to replicate, particularly for incumbent managers. Firstly, we were born digital. Our technology exists in the cloud and has been built to be modular and to take advantage of open source software. This allows us to operate at very low cost. It also enables the use of machine learning techniques both for finding alpha, using alternative data and for optimising our operations. A second element is that we partner with our systematic traders rather than employ them. We offer modern infrastructure, capital and attractive profit sharing. This positively selects for systematic traders who are very good. Interestingly, often our traders are from non-traditional backgrounds. The final element is our focus on alignment. We have no management fee. We have first loss protection. Profit sharing is only on performance. In other words, we are strongly aligned on both the upside and the downside with our investors. We want to signal to them that we are on their side as true partners. Our success is tied to our investors’ success.
If you hadn’t been a fund manager, what would you have been doing?
Well, I was a ski instructor in Austria for three years. That profession held a certain attraction. Alternatively, and completely orthogonally, I would have liked to have become a mathematician. I find mathematics very interesting and very influential in an understated way.
Hong Kong-based OP Investment Management (OPIM) keeps growing and helping some interesting hedge fund managers to launch their own funds. Former banker Michael Wegener, now Managing Partner of Case Equity, is one of them. HFC’s Stefan Nilsson decided to have a chat with Wegener about his event-driven investment strategy.
What can you tell us about your global event-driven strategy?
Case Equity is a global event-driven investment firm across merger arbitrage and special situation equities. Its philosophy is one of a global CIO office investing in best-in-class event-driven situations; defined as value-oriented, event-driven – hard or soft catalyst – with shareholder momentum overlay.
What sets you and your strategy apart from all the other emerging managers in Hong Kong?
Case Equity is the one and only event-driven hedge fund running a global strategy out of Hong Kong, Asia; as event-driven requires the key success factors of information transparency, board accountability and corporate governance. Intra-Asian investing were to add a political dimension coming with elevated risk beyond many investors control; hence our focus on Western markets, many of which trans-Atlantic deals, e.g. Johnson & Johnson’s recent US$30 billion acquisition of Actelion.
You have launched your fund on the OPIM platform. Why did you choose to work with OPIM?
I was keen to start on a multi-manager hedge fund platform allowing me to a) focus on investing and being in front of investors, b) know that the operational and regulatory aspects of the business are being taken good care of, and c) allowing me to keep full equity ownership, brand building identity and future growth support as a stand-alone entity.
Why did you launch the fund with Hong Kong as a base? You run a global strategy, are there advantages to being based in Asia?
I happen to be in Hong Kong, where Case Equity becomes one of the few choices for Asian high net-worth and family office investors looking for a) global equities diversification, b) absolute return strategy (9%-12% IRR target/run-rate) uncorrelated from broader equity markets (<30% beta to market), and c) exposure to global M&A activity (front-page, large-cap, cross-border, complex). Also, event-driven is not a day-trading strategy as an entry point depends on the right week or month – not day – with the investment exits predominantly sold in to the event at M&A (tender) offer price.
What did you do before you launched Case Equity?
I started my career as an investment banking analyst as part of Salomon Smith Barney’s (later Citigroup) Analyst Class 2000, having since focused on M&A/advisory for 15 years globally across multi-industries; prior to Case Equity’s Opportunities Fund launch in March 2016.
If you hadn’t been a fund manager, what would you have been doing?
Possibly M&A/strategy at a global corporate/diversified industrial group; though the skill set to anticipate M&A deals happening is best employed as an event-driven fund manager, delivering attractive risk-adjusted returns for investors.
Hedge funds and other market participants are paying close attention to the changes going on in the Treasury markets and the role of futures. HFC’s Stefan Nilsson recently had a chat about this and other trends in the FX and rates space with CME Group’s Ravi Pandit.
Singapore-based Ravi Pandit serves as Executive Director, Foreign Exchange and Interest Rate Products, Asia Pacific, for CME Group. He is responsible for expanding CME Group’s existing FX and interest rate business and developing new opportunities across the region. Pandit joined CME Group in 2015 and has 25 years of experience in the financial markets. Prior to joining CME Group, Pandit was a consultant to Singapore Exchange, where he provided strategic advice and project management for its launch of listed FX futures. Before that, Pandit worked for 12 years in Dresdner Bank and subsequently Commerzbank post-merger, where he headed up the local markets trading team and helped build up its Asian presence in interest rate and FX derivatives trading. Pandit also worked in various trading roles at Barclays Bank in Hong Kong, Singapore and Tokyo, and in operations and technology at Citibank in Hong Kong and Mumbai. Pandit holds a master’s degree in Chemical Engineering from Syracuse University and an MBA in Finance from the University of California, Berkeley.
What is your outlook for the treasury market? Will we see futures having a significant impact on the cash markets?
Treasury cash market liquidity has been impacted by banking regulations such as the leverage ratio and consequent lack of growth in bank balance sheet. This can be evidenced by negative swap spreads which have persisted since September 2015, shrinkage of the repo market, and increasing price impact of trades. In the face of these challenges, Treasury futures offer market participants a capital efficient, off-balance sheet instrument for exposure to Treasuries. We have seen reports by market commentators which talk about how the liquidity in Treasury futures has become comparable to, if not superior to, liquidity in the cash Treasury securities markets, and that futures are especially resilient during non-US trading hours. Treasury futures daily volumes are now 77.8% of the cash market (on a 52-week moving average), up from 56% in 2012. This shift is expected to continue as participants realise the value proposition provided by Treasury futures from a round-the clock liquidity and capital efficiency perspective.
How can treasury notes be used as effective hedging tools?
Treasury futures provide an effective risk management tool that is liquid 24 hours a day. These instruments are listed with a variety of maturities, based on current market conditions. Their effective durations are approximately 2, 5, 7, 10, 20 and 25 years. Additionally, participants needing exposure at another maturity point can use a combination of these instruments to create a hedge. In a basic hedging strategy, Treasury futures can be bought – to hedge for a short cash bond or paid IRS position – or sold – to hedge for a long cash bond or received IRS position. The number of futures to be used for hedging is generally determined by matching the BPV (basis point value) of the Treasury futures contract to be used, with that of the underlying exposure being hedged. Besides directional hedging of a single exposure or a portfolio, Treasury futures can also be used to trade spreads versus other assets, such as corporate bonds or interest rate swaps, as well as targeting curve exposure for relative value positions, such as 5-year versus 10-year spread. In response to strong client demand, in January 2016 CME Group introduced the Ultra 10-Year Future, providing close proxy for cash 10-year Treasury note exposures, with an innovative application of the classic deliverable basket structure of Treasury Futures. This capital efficient instrument is highly complementary to existing benchmarks, enabling new spread and curve trading opportunities. In the 10 months since launch, we have seen wide market adoption with over 300 clients participating globally and open interest growing to 250,000 contracts.
What has the impact of uncleared margin rules been on bilateral trades?
Uncleared margin rules, imposed by the BCBS, have been implemented starting from September 2016 in a phased manner and are expected to cover most counterparties in all major jurisdictions by September 2020. The main thrust of the rules is the imposition of initial margin and variation margin for all non-centrally cleared derivatives. The imposition of the rules is expected to increase the cost of trading bilaterally on an uncleared basis due to the cost of posting initial margin with all bilateral counterparties – netting benefits are not achievable for bilateral trades – as well as the operational complexities of calculating and settling these margins. In the rates and FX products space, the products most likely to be affected include non-deliverable forwards (NDFs), FX options, cross currency swaps, swaptions, other OTC options and inflation swaps. Where the cost of trading bilaterally becomes prohibitive, we could see these market shrink or migrate to a centrally cleared or listed alternatives.
What other major trends are you seeing or expecting in the rates and FX space?
There is a great deal of interest from market participants in looking for capital efficient listed or centrally cleared solutions for replicating bilateral OTC trading. This has resulted in a significant increase in the clearing of non-mandated products. CME has seen evidence of this in the tremendous uptake of interest rate swaps denominated in Mexican peso and Brazilian real, and is beginning to see increased interest in clearing U.S. dollar swaptions and clearing FX non-deliverable forwards clearing. CME is also working on solutions to help reduce the margin impact for other products affected by regulations, including OTC FX options, additional interest rate swap currencies and a solution for clearing the repo market. We also expect a parallel increase in trading of listed FX and rates options, given the growing number of participants using these standardised instruments for managing risk. Related to the trends in OTC products is the evolution of the execution models as a result of growing client demand for more centralised and efficient forms of price discovery. History shows that when products begin trading electronically, the increased transparency and access expands the overall client base, particularly from international markets, and therefore the liquidity and trading volumes improve as a result. We have seen this trend manifest itself in listed interest rate options, where new firms have started participating in the electronic markets and, as a result, the percentage of options traded electronically has increased. In October 2016, this metric reached over 73% for Treasury options and 25% for Eurodollar options, a substantial uptick from a year ago.
Australian fund manager Global Commodities Limited has a long history of managing commodities in its long-only flagship strategy. Now the firm has a long/short strategy as well. HFC’s Stefan Nilsson had a chat with portfolio manager Dr. Gavin Bowden about the new alpha strategy.
What can you tell us about Global Commodities’ new risk premia long/short strategy?
Global Commodities has a long track record actively managing commodity beta. However, we were often asked by investors if we could apply our strategy in a market-neutral approach to reduce the volatility associated with the commodity asset class. Historically, we have successfully captured commodity risk premia with our flagship Active Global Commodities (AGC) strategy, but reducing dependence on the economic cycle and isolating commodity alpha was something that was attractive to some of the investors we were speaking with. This was the catalyst that resulted in the long/short version of our commodity program. We call this approach the Global Commodities Risk Premia (GCRP) strategy. GCRP is an absolute return strategy designed to capture commodity factor premia over time. In the current zero interest-rate policy and negative interest-rate policy environments that we find ourselves in, the hunt for yield is paramount and GCRP provides a unique source of yield that is uncorrelated to the major asset classes and other forms of alternative risk premia.
What are the main differences between your strategy and a standard CTA?
The GCRP strategy capitalises on how commodities are stored, transacted and valued. Momentum is the premier market anomaly and most CTAs have a heavy reliance on trend following. GCRP not only looks at price signals such as momentum and mean-reversion but also at a range of commodity factors as diverse as carry/roll, seasonality and relative value. This results in return drivers that are more diversified than a typical CTA. In addition, GCRP focuses exclusively on commodity markets whereas most CTAs also have large exposure to bonds, equity indices and FX. GCRP is also unleveraged compared with CTAs that generally employ leverage and often carry greater volatility in their return profile. When we performed the analysis and looked at the correlation between GCRP and the SG CTA Index since January 2000, we found that there was effectively no correlation at all. Even over rolling three-year periods the correlation remained consistently low and oscillated around zero.
What’s the thinking behind running the investment strategy in a systematic fashion with a discretionary overlay?
The commodity factors that we have identified have been the basis of many years of research. Since they are readily quantifiable it makes sense to have them combined in a quantitative model to capture the return in a systematic fashion. The discretionary overlay only applies when we move into tail events that the model has not seen before. In these situations there are benefits to having a portfolio manager taking the system off of autopilot and managing risk appropriately. The outlier events are also quantifiable and we want to avoid situations where the model would be generalising too far beyond the range of the data seen during model development.
Some commodities markets have started to pick up this year – is it still a good time to invest in a long/short commodities strategy?
Commodities are certainly on the move in recent times and we have seen natural gas up over 50% in Q2 2016, with the entire energy sector rebounding strongly from the lows set in February. Soybeans, cotton and sugar have also put in very impressive rallies. Brexit and increasing global uncertainty has seen safe haven demand for precious metals increase with silver soaring in recent times as it also has industrial uses. The beauty of the commodities complex is that the return drivers are very diverse and there are generally always opportunities. Now is the time for an investor to be seriously looking at commodities as bonds and equities are in overvalued territory, especially in relative terms as commodities have been pushed lower over the last five years while other asset classes have been trending higher. Just recently former U.S. Federal Reserve chair, Ben Bernanke, the architect of U.S. quantitative easing and the subsequent “tapering”, held meetings in Tokyo with both Prime Minister Shinzo Abe and Bank of Japan governor Haruhiko Kuroda. It is likely talks were about the logical extension of current monetary policy, the adoption of so-called helicopter money. The next huge fiscal stimulus in Japan and then in other parts of the world will most likely be an expansionary move focused on infrastructure, which will bode well for commodity prices. With the adoption of helicopter money comes an increased risk of unexpected inflation at some point and it makes sense for an investor to look towards commodities to help protect against such risk. This is part of the case for commodity beta, however, the advantage of the GCRP strategy, which uses a long/short approach, is that it is agnostic to the economic cycle and it exploits cross-sectional opportunities rather than relying on directional market timing. So while there is stratification in the yield of each constituent in a given basket of commodities, there are always cross-sectional opportunities that the GCRP strategy can benefit from. It just depends on what the investor’s needs are. GCRP is really about providing a consistent source of yield that is uncorrelated to other styles or asset classes.
How do you divide up the work between you, as PM and head of research, and the firm’s founder, Greg Smith?
Since we have built the strategy to be largely systematic, it is a case of looking at the various metrics each day and ensuring the portfolio is tracking as expected. Greg and I have worked together for a long time and have a good understanding of how each other thinks and manages risk. When decisions do need to be made, we have a standard process for how that is determined. However, for most of the time the strategy is automated. As PM, I sign off on orders on a daily basis. In addition to both of us reviewing the portfolio daily, I spend a substantial amount of time in research to ensure that we remain at the forefront of latest developments and have incremental improvements in our technology and strategy, while Greg spends a large portion of his time in market analysis, client relations and marketing.
You have been with Global Commodities Limited since 2010. What did you do before that?
After completing a PhD in engineering, I undertook a postdoctoral fellowship at Harvard University. My work there involved utilising NASA’s remotely sensed satellite data and developing models based on artificial intelligence algorithms to forecast environmental variables, such as droughts. After completing my work at Harvard, I moved into the fund management industry where I worked in research and strategy development for two CTA hedge funds. It was a natural fit as I was able to keep developing the statistical and numerical modelling skills I had gained from my years working as an engineer, but in these roles I was able to apply those skills to the markets, which has been both challenging and fun and has suited my analytical mind.
You’re based in Adelaide, Australia. What do you get up to when you’re not running money?
I have a young family with two boys aged three and five and I love spending my free time with them. We are blessed in Adelaide with a great climate and we like to get outdoors as much as possible on the weekends. We have a family beach house down the coast where we often get away to enjoy some time fishing and surfing. I also enjoy cycling and love going for long bike rides through the Adelaide Hills or along the many scenic coastal routes that we have in South Australia. Each year I participate in the Tour Down Under cycling event where recreational riders are able to ride an actual stage of the UCI World Tour event before the professional riders complete the stage. I am also passionate about Australian Rules football and I’m a keen supporter of the local AFL team, the Adelaide Crows, so I like to attend their games with my family and cheer them on whenever possible.
If you hadn’t been a fund manager, what would you have been doing?
As I mentioned, my background is in engineering where I predominantly focused on artificial intelligence and machine learning. I think if I wasn’t a fund manager I would most likely be working in this area and would be applying the latest robotic and AI technologies to solve environmental problems or perhaps in medical research applications. I think that would also be rewarding and would satisfy my desire to keep learning while solving interesting problems and technical challenges.
Clare Flynn Levy, during her stint at Beauchamp/Linedata, was one of the very early sponsors of the Hedge Funds Club. A decade later she is the talk of the town with her new fintech venture Essentia Analytics. London-based Clare Flynn Levy is a former fund manager and current financial software entrepreneur who uses behavioural data analytics to help fund managers do a better job of investing. Stefan Nilsson decided to have a chat with Flynn Levy about who she is and what she’s up to.
You’ve got an interesting career path so far – from asset management to fintech, back to asset management and, again, back to fintech. Tell us about your journey so far.
I started my career as a tech stock picker in the late 1990s, and was a long-only fund manager during the internet bubble. In 2001, I launched a long/short tech fund and I slogged away at that for a good four years, running very hard to stay in one place, and continuously aware that I probably wasn’t using my energy as efficiently as I could. I was always an early adopter of technology for fund management and while there was a lot going on in the electronic trading space at that time, what I really wanted was a data-driven feedback loop that could tell me exactly what I was good at, so I could do more of it, and exactly where I was repeatedly destroying value, so I could do less of that. No one could give me that, and without it, running money felt increasingly futile. When I joined Beauchamp Financial Technology, my hypothesis was that a tech company serving fund managers that was actually run by a fund manager would have a competitive advantage – and I was right. We sold Beauchamp to Linedata, and once we’d finished our earn-out, I joined Tisbury, a large European event-driven fund, this time on the business management side. The founder of Tisbury could see the need to diversify his investor base, and therefore his product offering, and he hired me to make that happen. My business plan got the green light in July 2007 – just in time for the first major rumblings of the financial crisis. By necessity, my business strategy focus switched from offence to defence, as we tried to stem investor redemptions. When I left Tisbury it was the end of 2009, I was pregnant with my first child and keen to get some distance, to figure out where the intersection of my skills, my passion, and my network lay. Essentia is the result of that soul-searching.
Your current firm, Essentia Analytics, is focused on using behavioural data analytics to help fund managers. How can you best describe what this means and how fund managers can benefit?
As a fund manager, you’re continually under pressure to perform, but there is very little assistance available when it comes to telling you how to do that. It’s like being a runner who can see his final times, and maybe even his lap times, but has no insight into what he could be doing differently in order to win more consistently. You’re focusing on the result, not on the process. And in fund management, so much of the result is outside your control, that the only way to really develop skill is to focus on getting the process right – yet you can’t do that without in-depth, ongoing data analysis. Professional athletes figured this out decades ago – now you have no chance of competing if you’re not using a data-driven feedback loop to continuously raise your game. Essentia is a data-driven feedback loop for investors. It uses data about your past trading behaviour and its context, along with data about the current state of affairs, to tell you exactly where you’re adding value and exactly what is repeatedly tripping you up. Then it alerts you when it notices one of those patterns re-emerging in your behaviour. Unlike most performance analysis software, it is designed primarily to help the fund manager make better decisions, not just to report on him. It’s proven to help fund managers make significantly more alpha, effectively by holding up a mirror and giving them precise feedback on how to play to their strengths and avoid their weaknesses.
How did you come up with the idea for this business?
It was really born of my own frustration as a fund manager. When you’re making money, no one asks too many questions, but when you’re not, the pressure to turn it around is intense. Yet no one has any advice for you on exactly what, if anything, you should be doing differently. It’s up to the organisation to offer that support, and yet most organisations don’t have a platform that makes analysis easy, repeatable, and user-friendly for the portfolio manager to reflect on his own behavior.
You have gone down the cloud-based route. Was that the obvious way to offer access to your service?
Yes, the cloud simply is the most effective way to deliver software in this day and age. And the infrastructure available from the likes of AWS is far more secure than most companies can ever hope to be with their on-premises technology. A big part of why buy-side technology is so antiquated is the fact that it is mostly local-install and can only be upgraded once every few years, at great expense.
What have been your biggest challenges with setting up this business?
The biggest challenge has probably been the status quo. To the new generation of fund managers, what we do at Essentia is a must-have – they understand that our technology can empower them to make more money. But the old generation has been doing things the same way for 20 or more years – to them, what we’re doing sounds scary. They are used to technology being forced upon them, normally for the sake of compliance or reporting. It takes some patience on our part to help them realise that Essentia is a competitive advantage, not a threat or an admin burden.
What kind of fund managers have you mainly won as customers so far? Is it a service that can work both for major asset managers and smaller start-up funds?
Today, our customers are almost all equity managers, but they range from $200m AUM hedge funds who are keen to prove their skill to investors, to $300bn long-only managers who are trying to stem the flow of assets from active to passive funds. The patterns that our software identifies are unique to the portfolio manager, and the automated nudges we send them are based on those patterns, as well as on their personal workflow. In each case, our goal is to make the PM’s life easier, while helping him make measurably more alpha.
How do you anticipate Essentia’s business developing over the coming years?
I expect what we do at Essentia to become as standard in the fund management industry as “Moneyball” has become in professional sport. It’s common sense, really, but I expect the adoption of it to be driven by both the generational shift that is currently taking place in the industry and the growing threat of cheaper, passive investment strategies. Survival of the fittest is the name of the game if you’re a fund manager – more so than ever before – and Essentia is the key to investment fitness.
If you hadn’t worked in fund management and fintech, what would you have been doing for a living?
When I was a kid, I wanted to be a newsreader. I still think I would probably be good at that – I enjoy communicating. But I think I would miss the satisfaction that comes from building something and watching it grow.
Masaki Gotoh, Misaki Capital
Misaki Capital is one of the bright new fund manager stars in Japan. HFC’s Stefan Nilsson decided to catch up with Masaki Gotoh, who is a partner and chief investment officer at Misaki Capital in Tokyo.
Masaki is a Partner and Chief Investment Officer/Portfolio Manager of Misaki Capital Inc. Prior to co-founding Misaki, he was Portfolio Manager of the Asuka Value Up Fund, responsible for managing the Fund and the investment team. Prior to this, he worked at SPC Japan (Standard Pacific Capital LLC’s Japan Advisory) jointly responsible for long-short investments in Japan, Korea and Taiwan, as well as Morgan Stanley Japan in International Proprietary Trading and Goldman Sachs Japan heading Asia-Pacific Derivatives and Trading Research and brings 15+ years of experience in Finance. Masaki received his B.Eng in Computer Science from Cornell University and MBA from Northwestern University.
Tell us the story about how this experienced team set up on its own.
The genesis of Misaki started over 15 years ago when Yasunori Nakagami, our CEO, was a partner of a domestic management consulting firm. He found that successful engagement via value-enhancing projects with management led to an increase in the value of the business and thus its stock price. Hence, rather than charging high consulting fees to only those large companies that could afford it, he decided that it would be more mutually beneficial to invest in businesses and management teams that he likes, provide the same services for free and generate the returns from the market as the market realized this value. This led to the launch of the previous fund in 2005, and, after having built and managed the strategy for over eight years, the senior members of that team spun out to form Misaki Capital in late 2013.
You manage a sort of a friendly activist or engagement strategy. How would you describe your investment strategy?
We prefer to use the word “constructive” vs “friendly” to describe our strategy. “Friendly” implies constant support of the business regardless of the strategies undertaken by senior management. We consider ourselves “constructive” as our sourcing is based on strong business models that have H-O-P – hungry, open and public – management teams who are willing to listen to minority shareholders. When we consider an investment in a business, we think to ourselves “what would we do if we were to inherit this company in its entirety today?” The answer to this question tends to lead to value enhancement through long term growth of cash flows rather than excessively focusing on efficient balance sheet use. We believe management teams appreciate this mentality and become more open to our proposals. While balance sheet efficiency is critical, the solution tends to be one-off projects whereas cash flow expansion requires constant improvement (kaizen) and leads to long term growth of the business and a healthy long-term relationship with management. Therefore, we believe that having both investment – financial – professionals and management – consulting – professionals is crucial to our investment strategy. We take seriously our three Misaki values, Value for Investors, Value for Businesses, and Value for Society. What this means, of course, is that our engagement should add value for the businesses but, of course, must add value to our investors. As such, there have been and will be times when we must be less “friendly”. However, that is not the preferred tool and would be used as a last measure to uphold our fiduciary duty to the fund’s investors which, ultimately, should be value enhancing for the business as well. Ultimately, whatever the methodology undertaken to persuade management, we do so for business value enhancement. We have simply found that collaborative, constructive dialogue is generally more productive.
What’s different about your strategy compared to other fund managers out there?
The Japan “activist” universe is still very small and growing and, thus, allows for many varieties of activism. Our peers have their own biases on with whom and how they invest. As we are a pure long-only strategy with no hedging overlay, we very much consider ourselves a value investor and base our valuations on the margin of safety vs intrinsic value and the potential engagement upside, or the “double discount”. We look for companies that have a sustainable competitive advantage, focusing on the moat of Buffett-speak, in order to assess the sustainability of the cash flow generation and to compute, in greater confidence, this intrinsic value. But equally important is whether management is “engage-able”, i.e. we will not simply wait for the gap to shrink. Engagement is inherently a very human, high-touch, high-context strategy. As such, local, cultural connectivity is crucial to successful engagement. The fact that our entire team is Japanese, physically based in Japan leads to positive interaction with our companies. Finally, the content of engagement is a very customised, management consulting based approach in addition to the financial toolbox that traditional activists focus on.
We’ve now seen about 3.5 years of the Abe administration and Abenomics. How has the economy and investment landscape changed?
Although it might seem from outside of Japan that the pace of change occurring in Japan is slow, being on the ground and having been doing this strategy well before the Abenomics tailwind, we can definitely feel the landscape progress, much faster than it ever has in my investing career. The multiplying effect of the JPX-Nikkei 400 Index, the corporate governance code, the stewardship code, implementation of external board directors, and other factors have all had an enormous impact to wake up corporate Japan. This snowball effect has made it much easier to engage with companies compared to pre-Abenomics and have allowed us to build a portfolio very quickly with active engagement with a majority of our companies, both in and out of the present portfolio. We are still in the very early stages of corporate governance reform. It took the UK 20 years for the investment landscape to fully embrace the stewardship code. Large, structural shifts take time and it is unrealistic, if not outright naïve, to think that such massive shifts can happen in a year or two. The government has kickstarted the movement. It is now up to corporate Japan to embrace and we hope that we may be assisting that change in some small way.
Is your investment strategy sustainable in the long term or is it a theme you run for a few years during a period of change in the economy?
Regardless of Abenomics, our strategy was and would be the same if the environment were different. We only invest in 10-15 companies and, at any given time, we believe there are enough good businesses with strong, open management teams that are valued at a discount. This was true before and continues now. The universe has simply expanded. We don’t invest based on a top down theme, and are bottom up driven from this selection criteria. Furthermore, unlike the private equity market, which our strategy is often compared with, the universe of potential investments is very large and valuations have fallen through the decades to rational levels. Finally, there is no “completion” to business management enhancement, and particularly so in Japan where the starting point is so far behind the “managerial skill” curve. Contribution to this enhancement from shareholders is even more new compared to Western markets.
Foreign investors are less bullish on Japan than many domestic investors are. Do you think this is because of better access to information, home bias or something else?
With regards to corporate governance change, I would argue that there is scepticism on both sides. But I have noticed that long-time foreign Japan-watchers have most noticed the change. Those less bullish have, in my view, yet to notice the subtle changes that are occurring in Japan. Domestic investors, on the other hand, are no more bullish with regards to corporate governance and continue to focus on the short term. Again, I would note that we are not talking months or quarters but years. Long-term investors will be able to capture the most upside, domestic or foreign, and we believe the opportunity set is tremendous.
If you hadn’t been a fund manager, what would you have been doing?
I would probably be running my own business. After starting as an engineer in a large Japanese firm, I moved to finance, focused on derivatives, given my quantitative background. I then moved to proprietary trading based on a quantitative model, then fundamental long-short investing and now in what is almost a private equity approach to public markets. My career has become less quantitative and more qualitative over time, understanding businesses better and focused less on the minutia of the numbers. As such, running a company like one of our portfolio companies would be the ultimate transition. In that sense, I not only am fulfilling my dream by co-managing a venture called Misaki Capital, but also have the luxury to assist many other great businesses in the process.