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Hedge Fund Review EXANTE 2013 Report

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Hedge Fund Review’s special report gives particular emphasis on EXANTE’s potential to support the next generation of financial companies by connecting different types of clients such as asset managers …

Hedge Fund Review’s special report gives particular emphasis on EXANTE’s potential to support the next generation of financial companies by connecting different types of clients such as asset managers and high-net-worth individuals with its unique integrated electronic trading and fund platform providing access to all markets, all instruments and a variety of exchanges, as well as direct market access and high-speed infrastructure.

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  • 1. December 2012/January 2013 hedgefundsreview.comTHE VOICE OF THE GLOBAL ALTERNATIVE INVESTMENT INDUSTRY REVIEW Special report
  • 2. 2CONTENTSEditorMargie Lindsay +44 (0)20 7316 9440 FUND PROFILESmargie.lindsay@incisivemedia.comUS editorKris Devasabai +1 646 490 3975 5 MTG China Arbitrage Fundkris.devasabai@incisivemedia.com Capturing the essenceNews editor of market growthClare Dickinson +44 (0)20 7316 9434clare.dickinson@incisivemedia.com Liza Aizupiete reveals how the MTG China fund is entirely unique despite its tradingCommercial editorial managerStuart Willes +44 (0)20 7316 91982 system boasting an impressive heritagestuart.willes@incisivemedia.comPublisherAntony Chambers +44 (0)20 7316 9784 6 FTMantony.chambers@incisivemedia.com Playing it safeSales executive An innovative way to gain value fromLynsey Porter +44 (0) 20 7316 9786lynsey.porter@incisivemedia.com discounted medical accounts receivablesAdvertising fax is proving popular with investors+44 (0)20 7316 9935Advertising productionBen Cornish +44 (0)20 7316 9477 7 Chicago Capitalben.cornish@incisivemedia.com ManagementMarketing executive Beautifully boringDhiren Patel+44 (0) 20 7316 9501 Chicago Capital Management’s strategy will not get any pulsesEvents marketing managerJennifer Newsum +44 (0)20 7004 7469 racing, but its returns willSubscription and circulationenquiries+44 (0)1858 438 421 (UK) 8 Niagara Discovery Fund+1 646 736 1888 (US) A winning formulaFax +44 (0)1858 434 958incisivehv@subscription.co.uk David Rothberg sticks to what he knows and hires managers he knowsSubscription renewals for the Niagara Discovery FundManpreet Channa +44 (0) 20 7004 7441 OVERVIEWmanpreet.channa@incisivemedia.comSubscription sales 3 EXANTE 9 The Jordan CompanyTom Dodson +44 (0)20 7004 7536 Access all areas Hedge fund manager makestom.dodson@incisivemedia.comAmy Leather +44 (0) 207 484 7423 EXANTE managing partner Alexeyamy.leather@incisivemedia.com Kirienko discusses how technology is virtual track record a reality at the centre of creating systems and A focus on small and mid-capGroup publishing directorNat Knight +44 (0)20 7316 9705 product offerings that are attractive for companies in undervalued sectorsManaging director both asset managers and investors is proving a winning formulaMatthew Crabbe +44 (0)20 7316 9010 for The Jordan CompanyHead office32-34 Broadwick Street London W1A 2HGProblems? 10 Apis Offshore CapitalContact customer services on +44 (0)1858 A global approach438 421 (UK) or +1 646 736 1888 or emailincisivehv@subscription.co.uk. to opportunitiesPeriodicals Postage Paid at Rahway NJ. Extensive experience, coupledPostmaster send address corrections to: with a flair for finding overlookedHedge Funds Review, C/O Mercury Airfreight investment stories, is a profitableInternational Ltd, 365 Blair Road, Avenel,NJ 07001. strategy for Apis Offshore CapitalDisclaimer: No information in thismagazine should be taken as a solicitationfor investment in any of the investments 11 Quantum Brains Capitalreported on. From algos, with lovePublished by Incisive Financial Publishing Quantum Brains Capital has usedLimited. © 2012 Incisive Media InvestmentsLimited. ISSN 1471-8855. local expertise in mathematics and information technology to create what it believes is a unique set of trading algorithmsEXANTE 2013exante.eu
  • 3. 3 OVERVIEWAccess all areasTechnology is at the centre of creating systems and product offerings that are attractivefor both asset managers and investorsEXANTE, a Malta-based brokerage company, currently very low,” he says. “Stock marketshas harnessed cutting-edge technology to have proven themselves to be highlydevelop an integrated trading and fund correlated on a global scale and too reliantplatform to support the next generation of on liquidity rather than the intrinsic value offinancial companies, says managing partner the business.”Alexey Kirienko. Hedge funds, on the other hand, are “the The company was established in March ultimate structure for the next generation of2011 to exploit a gap in the market for finance”, says Kirienko. Investors can checkan execution broker that could provide on performance because administratorsan electronic platform with access to all calculate net asset value (NAV) on amarkets, all instruments and a variety of monthly basis and auditors then check theexchanges, as well as direct market access work of administrators. In addition, in theand high-speed infrastructure. event that an investor does lose faith in one “All the managing partners of EXANTE or more of the managers they have investedused to work with different brokers or with, they can simply drop the relevanthedge funds around the globe,” explains funds from their portfolio.Kirienko, “so the niche was obvious to While the alternative investment marketus and we simply set up the platform is often perceived to be opaque, Kirienkoto address those needs.” Clients include believes that proper due diligence by anprofessional investors, brokerage firms, external party can boost investor confidencehedge funds, financial institutions and asset in the sector. EXANTE itself implementsmanagement companies. strict criteria for listing funds and has EXANTE’s automated trading platform developed an in-depth due-diligence(ATP) also offers access to EXANTE Hedge process that involves plenty of direct contactFund Marketplace, an online platform with the fund managers before they arethat currently lists funds from more than accepted onto the marketplace.40 management companies. Professional Alexey Kirienko “We conduct a lot of interviews and findinvestors and financial institutions can out where the fund is domiciled, ensure ituse the platform to view information on additional information before being able has appropriate accountants, administratorsa variety of products and then invest with to simply add it to their portfolio with one and auditors,” Kirienko explains.one click. Management companies that list click,” states Kirienko. Past performance is also important.on the platform can gain exposure to users EXANTE’s infrastructure was designed to For example, EXANTE looks at how longsuch as high-net-worth investors, financial aid accessibility and to promote transparency. the management company has been ininstitutions and funds of funds. Kirienko argues that EXANTE’s hedge operation and how the fund fared during The idea for the listings tool came about fund marketplace can offer investors more difficult periods in the market such as thewhen brokers at the company found transparency and control than they would 2008 financial crisis.themselves repeatedly connecting different normally be able to achieve when investing “If the fund satisfies those parameters, wetypes of clients such as asset managers and money with a bank or in the stock market. go in depth with the manager about theirhigh-net-worth individuals. “An investor can use the platform to create strategies. If we think the strategies make “That wasn’t our core business, so a portfolio of managers that specialise in sense and there is edge, then we are happyinstead of introducing them via phone or various fields and even flavour the portfolio to list the fund on the system.” Kirienkoin person, we thought it would be much with bonds, stocks, and so on, receiving a fair adds that this is crucial to maintainingmore convenient to set up an online system risk/reward,” explains Kirienko. EXANTE’s reputation as a company thatwhereby our customers could click on a “But, even with a simple deposit in a bank, properly researches all of its listed funds.particular hedge fund’s name, see details you do not know what the risks are and “We look at it like we are going to invest inof its performance and maybe read some are simply paid an interest rate, which is them,” he says.www.hedgefundsreview.com Hedge Funds Review Special report   December 2012/January 2013
  • 4. 4OVERVIEW be too stringent. “At EXANTE we are all liberals,” he says, arguing that the market structure should be regulated, rather than the market itself. “Any regulations should be like a framework of honesty to allow liberal markets to function. If you start regulating exactly how markets should behave then you will just create more road signs that don’t solve any problems, they just cause more traffic around the junctions.” He argues that a good place for regulators to focus is on service providers to the industry such as administrators and accountants. For example, by requiring that they be paid by those who wish to view the resulting data and reports rather than by the fund being audited. “If the customer pays for an audit, he receives an honest audit,” Kirienko reasons. Current legislation is also too detailed, he adds, pointing to the mosaic of rules that have been in development in the US since 2010 under the Dodd-Frank Act with both the US Commodity FuturesFuture growth and the US. Trading Commission and the SecuritiesThe next step for the platform in 2013 will As well as adding regional managers in and Exchange Commission as regulators.be to augment further its hedge fund listings these areas, the company believes it can “The US is already over-regulated,” hewith the development of the EXANTE Hedge grow by selling white-label versions of its declares, adding that “each line in the [new]Fund Index, which was launched in February offering. “We think the white-label option is regulations creates 100 more interpretations”.2012. This is an equally weighted portfolio going to be our key focus,” he says.” EXANTE’s state-of-the-art co-locationcurrently composed of the 22 best-performing EXANTE has not offered any white-label infrastructure and ATP have been designedmanagers listed on EXANTE’s ATP. packages to date but hopes to sell between to attract investors of all shapes and speeds, EXANTE aims to increase this pool five and 10 in 2013, according to Kirienko. from conservative money managers to high-over time to reach a minimum of 100 “There is a lot of interest in this, especially frequency traders. Attempts to limit themanagement companies. Kirienko believes if the platform comes with all of the latter under the new regulations “will notthe index forms a strong basis for an instruments we have developed,” he adds. end well”, according to Kirienko.industry benchmark, as well as providing He believes such initiatives tend to beease of access for EXANTE’s users. Regulatory outlook suggested by those who do not understand The user experience targets a gap One potential break on expansion and and have no experience of the market. “High-identified by EXANTE’s management development could be the stricter regulations frequency traders – our customers – takethrough its own experience of the market. on trading that have been developed in the large orders [such as those placed by pension“We wanted to create a tradeable index that wake of the 2008 financial crisis. These will funds] and take them apart, shifting themcan be accessed with one click,” he says. affect the hedge fund structure that Kirienko to other markets like Asia or Europe and“That’s very important because I haven’t seen believes will be the definitive model for the London, and transforming them into differentsuch a system elsewhere.” The key challenge next generation of financial company. shapes to trade in option markets, physicalin 2013 for EXANTE will be expanding the He is confident about the suitability spot markets, futures markets and so on.”index by attracting liquidity and interest in of EXANTE’s business model to the new Kirienko calls these larger trades “unwise”the secondary market, according to Kirienko. regulatory regime. “We think we are operating and argues that, if pension funds invested As for the Hedge Fund Marketplace, the in the correct way and that the rest of the more in technology, their systems wouldaim is to increase that to include as many as market should operate like this,” he says. recognise the best and most effective way of200 management companies. EXANTE also “Managers with assets of $1 million or executing these orders.plans to expand regionally, opening offices $10 million should have systems such as Overall, just as EXANTE was designed toin London and Zurich, as well as turning its ours to showcase their talents. Technology help players of all shapes and sizes accessattention to emerging markets such as India, is key to everything.” Over the past a range of products and markets, KirienkoSouth Africa and Brazil, among others. year EXANTE has already improved its believes equal access to markets should “We have a presence, but we would like infrastructure by adding new server units be key to any attempt to regulate financialto strengthen it,” Kirienko says, adding in New York, Chicago, London and Moscow, markets. “There should be some lightthat EXANTE has a lot to offer emerging among other cities with exchanges. regulation to ensure everyone has equalmarkets, particularly those that may not As for the regulations that are currently access,” he says. “Each market member has tobe as technologically advanced as Europe taking shape, Kirienko worries they may have equal rights.”EXANTE 2013exante.eu
  • 5. 5 MTG CHINA ARBITRAGE FUNDCapturing the essenceof market growth and commodities traded on all major ChineseLiza Aizupiete reveals how the Photo: Normunds Braslins exchanges. The nexus of its trading, however, isMTG China fund is entirely the futures instruments listed on the three largest regulated commodities exchanges in China andunique despite its trading system the largest commodity exchanges in the UK andboasting an impressive heritage the US. Besides this, the fund is also increasing its trading activities in the physical and over-the-MTG CHINA ARBITRAGE FUND prides itself on counter markets.having entered a new and exciting market place. “Effectively, arbitrage is made possible becauseIt is the second hedge fund created under the MTG of the Chinese market offering – similar productsFund SPC umbrella. But what sets this fund apart is, with other well-developed markets that may differas its name suggests, mainland China. The Chinese in quality, location and other specifications,” saysmarkets are notoriously difficult to access for any Aizupiete. “Our fund strategy captures the priceforeign entity wishing to participate. But, as MTG’s discrepancies that occur due to different marketmanager Liza Aizupiete explains, the fund has Liza Aizupiete participants with diverse sets of needs for hedgingsuccessfully established its presence in China, with or speculating. Our research team is constantlystaff working at its Shanghai office. scouting for the best market opportunities, and The MTG China fund was launched in May 2011. It has netted management enforces the most optimal funds allocation across theinvestors a solid 16.87% (which translates into more than 11% per trading strategies. The fund’s current broad asset allocation stands atannum) after tax and expenses since its inception. “Considering more than 80% in commodities (including physical material), lessvarious investment restrictions and the relatively small size of the than 10% in currencies, and the rest is kept in cash.”fund, it has done exceptionally well in building up the infrastructure With the long-awaited advent of new listed derivatives such asand setting up core operations, thus realising the investment options, interest rates and bond futures, the MTG China fund is setstrategy,” says Aizupiete. to grow exponentially, capturing the very essence of the Chinese “The fund draws on extensive experience in arbitrage from market growth.the MTG Multi-Arbitrage Fund’s success. We are continuing theinvestment pattern originally developed by the MTG Multi-Arbitrageteam on a new platform that the Chinese markets offer. It is not,however, a pure replica of the trading system, as the new Chinaenvironment noticeably differs from other developed markets.” Technically, algorithmic trading is less developed in China.Therefore, a completely new algo-trading approach had to bedeveloped to accommodate a number of restrictions and regulationsin trading via application programming interface systems. Trading in China is a commonplace activity. The Chineseauthorities welcome more institutional participation, in part tostabilise often volatile trading volume swings. The market remainslargely closed to outside investors, yet some progressive investmentprogrammes are being set up to gradually liberalise the secondlargest market in the world. It is only a question of time and politicalwillpower to continue the market reform process, explains Aizupiete,and the MTG China fund is part of this unique opportunity to growalongside the global China market developments. “We view this as our core selling point: to be able to offerindividual and institutional investors participation in the Chinesemarkets, investing in strategies with low or no correlation to theoverall equity or bond markets,” continues Aizupiete. “The fundstrives to achieve long-term capital appreciation using a proprietaryarbitrage trading system designed and tested to take advantage ofmarket inefficiencies.” The fund’s investment scope includes financial instrumentswww.hedgefundsreview.com Hedge Funds Review Special report   December 2012/January 2013
  • 6. 6FTMPlaying it safeAn innovative way to gain system. This strategy typically consists of fivevalue from discounted medical open trades in sterling and US dollars. As a result, Dobozy says, the fund can generate returns thataccounts receivables is proving are separate to the medical accounts receivablespopular with investors strategy, while also providing liquidity, something accounts receivables cannot deliver. Overall, Dobozy argues that FTM offers investorsFORGET THE MARKET (FTM) fund manager Endre a safe bet with a 95% capital secured portfolio andDobozy believes he can offer investors a safe haven an annual return of 12%. “If the market falls 10%,by capitalising on the inefficiencies of the US health 20% or even 30%, it doesn’t matter to us,” he says.insurance market. “Even with the foreign exchange component – Dobozy describes himself as “extremely risk which is set at a 35% stop/loss – the worst thataverse, the kind of guy that won’t even cross the could happen is a 1.75% loss to the overall portfoliostreet unless there are traffic lights”. That attitude and we make sure that doesn’t happen.”inspired him to develop a strategy to generate Endre Dobozy So far, Dobozy’s risk-averse bet has paid off. Asreturns outside of the equity market with minimal of December 1, 2012, the fund is now in its 33rdrisk to investors. positive month in a row, with no negative months. The resulting fund, FTM, was launched by Dobozy in 2010 to feed With a major shake-up on the horizon for the US healthcarethe post-financial crisis appetite for products with an emphasis on system under the 2010 Patient Protection and Affordable Care Actcapital preservation. He aims to generate returns commensurate (also known as ‘Obamacare’), some may question whether returnswith market averages without the rollercoaster ride generally are sustainable. Until the legislation is fully rolled out, it remains toassociated with investing in recent years. be seen how it might affect FTM’s future, says Dobozy. The main component of the fund is an investment in discountedmedical accounts receivables secured at an average rate of $3 forevery $1 invested. This investment is routed through a US-basedmedical accounts receivables company, which covers the medicalexpenses of insured accident victims involved in personal injurycases. A lien taken against a portion of the payout from the insurancepolicy is paid once a claim is settled, creating FTM’s returns. “Because the US system is so inefficient, it can take two years ormore for insurance payments to come through. So we speed theprocess up and generate a return that has no correlation to themarket,” Dobozy says. In order to minimise risk, the receivables are spread acrossa number of insurers with no more than 10% of the portfolioattributed to any one company. To further minimise risk, the funddoes not blindly purchase a pool of receivables. Rather, each case iscarefully reviewed and chosen based on criteria such as who was atfault and whether the injured party is insured. Dobozy adds that FTM is also heavily involved in the researchand due diligence conducted by the accounts receivables companywhen choosing its cases. “We assist with the research of the cases andensure the accounts receivables company is audited annually. We seethe hospitals being paid, the patients being helped and healed, andthe money coming back from insurance policies,” he says. The “incredibly strict” criteria used to choose cases means thattypically only one out of every five cases reviewed is eventuallychosen for funding by the accounts receivables company. Dobozy ensures diversification by keeping between 5% and 10%of the fund in cash and investing the remaining assets – up to amaximum of 5% – in the currency markets via a proprietary tradingEXANTE 2013exante.eu
  • 7. 7 CHICAGO CAPITAL MANAGEMENTBeautifully boringChicago Capital Management’s know what the tax rates would be or if they wouldstrategy will not get any pulses continue to receive government subsidies. It’s impossible to make an intelligent decision about aracing, but its returns will deal in that situation,” he says. However, Gerbel is convinced deal activity willCHICAGO CAPITAL MANAGEMENT (CCM) offers a pick up in 2013.refreshing antidote to the hallucinogenic complexity “The outlook is very good for MA,” he says.of many modern hedge funds. “There is $2 trillion of cash on the balance sheets Founded in 1998 by Steven Gerbel, CCM employs of corporate America. Asset prices are at historicala ‘classic’ merger arbitrage strategy, concentrating lows. Companies can borrow at the lowest ratesexclusively in publically announced mergers and in a generation. A lot of deals will be cut once theacquisitions (MA) in developed markets. fiscal cliff is behind us and the questions over tax CCM does not speculate on rumoured rates and government spending are resolved.”transactions and steers clear of high-octane deals Gerbel expects to see plenty of deals in the Steven Gerbelwhere hostile bids and antitrust concerns may cause financial, pharmaceutical and technology sectors.spreads to widen. He predicts a large number of smaller US Put another way, the fund is reassuringly boring. “Merger regional and community banks will be forced to merge in 2013 as aarbitrage is not the most exciting strategy,” Gerbel concedes, “but it result of Dodd-Frank and the Basel III capital rules, while pharmadoes produce very consistent returns.” and tech companies need to make acquisitions to fill product gaps Merger arbitrage spreads – the difference between the offer price after cutting back on research and development in the recession.and the target company’s current trading price – have historically While the MA market may heat up in 2013, Gerbel has notracked at around three times the risk-free rate. This means the intention of ramping up the fund’s risk taking. “We’re going to doarbitrageurs can earn an attractive return by investing in relatively what we’ve always done,” he says, “which means doing the littlesafe deals with a modest amount of leverage. things right, staying disciplined and avoiding style drift. It’s classic, “You need to have a very methodical, repeatable approach. boring, blocking and tackling, but it works.”We do the same thing over and over again, making a small profitevery time. It adds up to a nice return at the end of the year andcompounds handsomely over time,” states Gerbel. “What you shouldn’t do is chase deals with wide spreads, thinkingyou’ll make money more quickly. That doesn’t work. When you’rewrong on those deals, you lose a tremendous amount of money. Therewards rarely justify the risks.” CCM’s philosophy is to “hedge as much as possible”. Gerbel aimsto collect the spreads on offer with the least amount of risk andvolatility. The fund typically has exposure to around 35 deals. Therisk of individual positions is capped at 5% of the fund’s value.The risk profile of transactions in the portfolio is estimated on adaily basis and the fund’s position sizes, hedges and leverage areadjusted accordingly. Although Gerbel tends to favour “boring deals” with limiteddownside risk, CCM’s returns are far from mundane. The fund hasdelivered compound annual returns of 17.32% since its inception in1998, with a standard deviation of 11.23%. CCM’s returns have held up despite falling deal volume andspread compression since late 2011. While many merger funds havestruggled in this environment, CCM returned 6.51% in 2011 and wasup 4.38% in 2012 through the end of October. Gerbel ascribes the low deal volume in 2012 to heightenedpolitical and economic uncertainties, which made chief executiveofficers reluctant to take on the risk of an acquisition. “Management teams were understandably cautious. They didn’twww.hedgefundsreview.com Hedge Funds Review Special report   December 2012/January 2013
  • 8. 8NIAGARA DISCOVERY FUNDA winning formulaDavid Rothberg sticks to what he within FMG. The group performs fundamental analysis of supply and demand for commoditiesknows and hires managers and combines this with technical analysis tohe knows for the Niagara confirm their views and establish entry points and stops for trades.Discovery Fund The fifth and final leg of the fund is a valueTHE NIAGARA DISCOVERY FUND provides exposure equity strategy. This manager invests in US mid-capto five distinct macro-oriented investment styles in a stocks that are priced at a discount to value andfund of managed accounts structure. have plenty of free cash flow. Rothberg hedges out The fund is the brainchild of Albert Friedberg the beta of the long portfolio with futures contracts.and David Rothberg. Friedberg is the founder and Rothberg assigns the risk budgets andchief investment officer of Friedberg Mercantile leverage limits for the five strategies. In makingGroup (FMG), one of Canada’s best-known futures allocations to the strategies, he considers theirtrading houses. relative volatilities, risk/reward profiles and David Rothberg FMG manages close to $1 billion in the Friedberg correlations. Asset allocation is dynamic, althoughGlobal Macro Hedge Fund, which has achieved the weightings rarely shift dramatically as thecompound annual returns of more than 17.5% since its inception in strategies tend to be uncorrelated in most market environments.December 2001. The trades of underlying managers are continuously monitored Rothberg, the fund’s strategy adviser, has been affiliated with FMG and any excess aggregate risks are hedged out at the portfoliosince 1976 and sits on the macro fund’s risk committee. level. Stress tests are also performed to ensure the fund’s losses are Friedberg’s investment approach, which he has employed contained in a market crisis.successfully for nearly four decades, is built around five main trading The result is a portfolio that provides exposure to a diverse mixconcepts: momentum, sentiment, fundamental and technical of uncorrelated macro-investment strategies with none of theanalysis of commodities, discretionary macro and value investing. additional costs of a traditional fund of hedge funds. While Friedberg’s macro fund utilises these approaches in a singleportfolio, the Discovery Fund assigns each strategy to an externalmanager. The fund managers were hand-picked by Friedberg andRothberg, and most of them have strong connections to FMG. “The idea behind the fund was to do what we know with peoplewe know,” says Rothberg. “We hire managers we have knownfor years to run strategies that, in aggregate, deliver uncorrelatedreturns with no beta.” The momentum strategy captures long-term price trends infutures markets. The systematic programme relies on an algorithmto identify trends that are likely to persist beyond rational levels.Volatility filters are used to size positions and identify exit points.The sentiment strategy serves as a counterpoint to momentum. In this case, the manager – an FMG alum – focuses on scenarioswhere consensus runs contrary to current price trends. Tradingopportunities are identified by analysing divergences andconvergences in the relationship between open interest and price. Rothberg characterises the momentum and sentiment managersas “professional games players” who, like all commodity tradingadvisers (CTAs), compete with other speculators to profit frominefficiencies in the futures markets. In contrast, the Discovery Fund’s discretionary macro manageruses futures to express a top-down view of global economic trends.This manager’s trades are based on the interplay between price,time lags, supply and demand fundamentals as well as economicimbalances. The commodity portfolio is managed by a team of four tradersEXANTE 2013exante.eu
  • 9. 9 THE JORDAN COMPANYHedge fund manager makesvirtual track record a realityA focus on small and mid-cap indications that a company is likely to be lookingcompanies in undervalued for strategic alternatives, such as a tender offer, a restructuring or a dividend payment.”sectors is proving a winning For example, the fund is currently invested informula for The Jordan Company the US regional banking sector, where Yazvinski believes the larger regionals – the US top 30A BACKGROUND in corporate mergers and banks – currently have no avenue for growthacquisitions (MA) has allowed Vad Yazvinski, other than taking over smaller players. “They arechief investment officer of The Jordan Company looking for names that either represent a newand portfolio manager for Jordan Capital Asset geography or an attractive entry point from aManagement, to hone a strategy of targeting financial standpoint, which means names thatundervalued small and mid-cap companies that are are selling for below tangible asset value in manyripe for acquisition. cases,” he explains. Intent on learning the MA business after “The fund has positions in some small regional Vad Yazvinskigraduating from Western Carolina University, banks that we believe are great acquisitionYazvinski went to work for the corporate strategy targets.” Regional banks in states such as Texas andgroup of SP 500 company Total System Services. Wisconsin are particularly attractive because many large banks have “My long-term goal was always to start a fund. I wanted to learn a smaller footprint in these states, according to Yazvinski.how the MA process works from the inside and then go out there This sector also provides the fund with exposure to what heand put together an investment vehicle,” says Yazvinski. In June believes is the most undervalued asset class in the world – US real2008 he did just that, launching Atlanta, Georgia-based Jordan estate. “This is currently one of our largest areas of exposure, butCapital Asset Management. we invest mostly on the preferred side because the common equity Yazvinski’s previous investment experience consisted of six of US homebuilders and real estate is overpriced,” he says. “Also weyears spent developing a virtual track record, during which time he effectively have an indirect bet on this sector by way of regionalentered and won portfolio simulation competitions such as MSN banks since the majority of their loans are related to real estate.”Money’s 2006 Strategy Lab Open. When it came to setting up thefund, The Jordan Company accepted this virtual track record asproof of his ability and of the strength of his investment rationale. “There are very few people that can successfully transfer aninvestment strategy from the virtual to the real world due to the veryemotional aspect of playing with funny money versus real money,”he says. It is a long/short fund with below-average volatility invested inpublicly traded securities. The fund is typically 55% net long andunleveraged. Yazvinski aims for a return that is slightly better thanthe market with a third of the risk. While the $2 million held at launch in 2008 has since grown to$31 million, Yazvinski’s aim is to build a track record rather thanaggressively market the fund. “For me investing is not just my work, it’s something I want todo for the rest of my life. So I want to focus on slowly and steadilyexecuting the strategy I’ve developed over the last decade, I’m notreally worried about the pace of assets under management growth.” His strategy involves identifying small and mid-cap companiesin undervalued sectors that are ripe for change in the next 18 to24 months. “I fully subscribe to the Warren Buffet-style valuemethodology of looking for businesses that are trading at a discountto intrinsic value,” he says. “However, the big difference between myself and typical valuemanagers is that identifying a catalyst that will provide valuerealisation is also an important part of my strategy. I look forwww.hedgefundsreview.com Hedge Funds Review Special report   December 2012/January 2013
  • 10. 10APIS OFFSHORE CAPITALA global approach toopportunitiesExtensive experience, coupled “When these ships are ordered, delivery can bewith a flair for finding overlooked made as much as three years later. At the moment, a lot of new ships are about to hit the water andinvestment stories, is a profitable it will take many years for them to be absorbed,”strategy for Apis Offshore Capital Barker explains. Demand for the ships has fallen as the US hasNEW YORK-BASED boutique hedge fund Apis become less dependent on foreign oil, he adds, aOffshore Capital aims to identify undervalued and trend that has been driven by the weak economicunderreported investment stories as they play out picture as well as increasing US domestic energyacross the globe. production. While Barker predicts that tanker According to Apis Offshore Capital fund manager demand will eventually recover, he says theDan Barker, his team’s level of experience sets current state of affairs in the market is likely to lastthe fund apart from its competitors. Along with for some time.his current colleagues, Barker left investment The weak economic outlook has also affected the Dan Barkermanagement company JW Seligman to launch long side of the fund. “We remain cautious aboutApis Offshore Capital in 2004. global growth and currently favour areas in which the economic “As a team, we have worked together for 10 years and that’s what backdrop is not as important, although it tends to play some part ingives me the most confidence about Apis and our performance every company’s equation,” Barker says.going forward. We have had that continuity. We’ve grown together,” “We are invested in areas with a growth dynamic that is insulatedsays Barker. from what we feel might be a disappointing economic environment The fund is mainly focused on small to mid-cap companies, next year.”although it does invest in larger companies under the right At the beginning of December 2012, the fund was up 11% for thecircumstances. “It’s really about whether we can add value to the year. “This is somewhat in line with the benchmark MSCI index but,research process,” Barker says. “Inefficiencies are often greater in with about two-thirds of the market’s volatility,” Barker says. Sincesmall to mid-cap securities, so we naturally gravitate there, but it inception, the fund has returned 118% versus 53% from the MSCI.doesn’t mean we won’t look at a large-cap situation if we think wecan bring edge to that idea.” Geographical concerns are viewed with a similarly open attitude.Barker believes the fund’s borderless approach to investingallows for maximum leverage of each idea. The team’s combinedexperience in global equities gives the fund a head start on emergingtrends as they spread to new regions or sectors. For example, Apis Offshore Capital recently added a long positionin Japan-focused alternative energy player West Holdings to itsportfolio. The company has access to the lucrative governmentsubsidies currently being offered in Japan to stimulate energyproduction after its nuclear sector was shut down following thedevastating earthquake in March 2011. “This is typical of what we can do at Apis in that we’ve watchedsimilar subsidy programmes roll out in Germany, Italy and Spain,”Barker says. “It creates a bonanza of activity in the sector. But whatis interesting about Japan’s programme is that the subsidies [in theregion] are more than double the best offered in Europe. We thinkwe are early to this play in Japan because of the experience we havein Europe.” Apis also looks for ways to short the market via long-term cyclicalthemes. Recently, the fund has been short the global tanker market viastocks such as energy transportation company Overseas ShipholdingGroup. The thinking behind this strategy, Barker explains, is a globaloversupply of very large crude carriers, long-haul tankers that cantransport two million barrels or more of crude oil.EXANTE 2013exante.eu
  • 11. 11 QUANTUM BRAINS CAPITALFrom algos, with loveQuantum Brains Capital has usedlocal expertise in mathematicsand information technologyto create what it believes is aunique set of trading algorithmsBEING ABLE to tap the knowledge of professionals Daily turnover for the fund is around $1 billion, Arsen Yakovlevin a range of fields including mathematics, quantum which is about 10% of the daily turnover of thephysics and computer theory is handy when trying Russian market, according to QBC.to formulate an algorithm that can make money in today’s complex During the development of the fund, combinations ofmarkets. algorithms were created and then tested using an approach based That is what Russia-based Quantum Brains Capital (QBC) on Monte Carlo methods. The best-performing trading programsbelieves sets it apart. With the combined brain power of teams were selected for the fund, which creates an optimal portfolioof mathematicians, physicists and IT specialists to hand, it has maximising risk/return ratios, according to QBC. The testing alsospent eight years and more than $10 million developing trading determined the weight of each strategy in the portfolio and howalgorithms before putting them to work in the Bermuda-domiciled the strategies interact with one another.Quantum Brains Capital Fund, launched in 2012. QBC continues to tweak its systems, to make them better and The management company was co-founded by Arsen Yakovlev more powerful, with the hope that they will become faster andand Gregory Fishman. Yakovlev has a background in developing more effective.mathematical methods for trading and algorithmic models. He Risk management is impossible if you cannot predict futurestarted his investment career in 2004 as a portfolio manager of a events, believes QBC. With that in mind it has built a model basedRussian private investment fund. on hidden semi-Markov processes to predict changes in the market Fishman’s experience spans both IT and finance, having worked environment. The process, named for the Russian mathematicianin the financial technology and communications businesses. He is Andrey Markov, is a stochastic process satisfying a certain property,founder and president of Automated Intelligence Systems, a Russian called the Markov property.scientific institute established in 2006 to carry out research and As with many hedge fund strategies, market volatility is useddevelopment on artificial intelligence systems. to generate returns. For this reason, intervention in markets by From its base in Russia, QBC has access to some of the top governments and central bankers has impacted performancemathematics and IT graduates in the world. The University of in 2012. Announcements from the European Central Bank, forSt Petersburg is known for its IT training and Russia has long had example, tend to send markets into frenzy, pushing volatilitya focus on maths education. In addition, QBC sources science higher. During such months, the fund generated positive returns.expertise from the UK and Russia. Overall, it has retained positive performance for the year, Quantum Brains Capital Fund combines several different trading according to QBC.strategies: trend following, mean reversion, arbitrage, fixed income, The fund is on the Emerging Manager Platform, a Bermuda-high-frequency trading and heuristics, which in its most basic form based platform for start-up managers established by managingmeans finding solutions through trial and error. Long-term arbitrage directors of Apex Fund Services Peter Hughes and Johntrades provide a contrast to the high-frequency trading strategies. Bohan. Apex provides administration services for funds on the The fund trades a range of instruments and markets with a focus platform. Legal and accounting support for new managers ison Russian equities, which have maintained a positive performance also given.through 2012. Russia’s blue chip RTS Index was up 5.07% in 2012 to Currently only internal money and some private asset managersmid-December. are invested in the fund, but QBC intends to open the fund to Close attention is paid to the correlation between assets. QBC external investors. QBC has big ambitions for asset growth for thebelieves that by maintaining a diverse portfolio, systematic risk fund as well as its performance in 2013, believing it can achieveis reduced. returns of at least 40%.www.hedgefundsreview.com Hedge Funds Review Special report   December 2012/January 2013

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