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  • 1. October 2012 EXANTE 2012 2012 2011 36.4% 25%201011% Anti-emotion Trading faster The emergence approach to than the speed of electronic stock trading of light gold?
  • 2. Contents In this issue… 03 A one-click approach to accessing alpha By James Williams 05 Volatile markets play into the hands of multi-arbitrage shop MTG Capital Management 06 Trading faster than the speed of light… Da Vinci Invest 07 Consistency drives performance of October 2012 WEELS fund Wermuth Asset Management EXANTE 2012 2012 08 Applying evolutionary ideas to algorithmic trading 2011 36.4% Quantum Brains Capital 25% 2010 09 The anti-emotion approach to stock 11% trading Anti-emotion approach to stock trading Trading faster than the speed of light The emergence of electronic gold? Courant Asset Management 10 The emergence of electronic gold…? Bitcoin 11 Spirit of entrepreneurism delivers cumulative returns of 480% Platinum Partners Publisher Special Reports Editor: Simon Gray, simon.gray@globalfundmedia.com Editor: James Williams, james.williams@globalfundmedia.com Sales Managers: Simon Broch, simon.broch@globalfundmedia.com; Malcolm Dunn, malcolm.dunn@globalfundmedia.com Marketing Director: Oliver Bradley, oliver.bradley@globalfundmedia.com Publisher & Editorial Director: Sunil Gopalan, sunil.gopalan@globalfundmedia.com Graphic Design: Siobhan Brownlow, siobhan.brownlow@globalfundmedia.com Photographs: Various Published by: GFM Ltd, 1st Floor, Liberation Station, St Helier, Jersey JE2 3AS, Channel Islands Tel: +44 (0)1534 719780 Website: www.globalfundmedia.com ©Copyright 2012 GFM Ltd. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of the publisher. This special report is sponsored by EXANTE and is intended solely to raise awareness of the company and its clients among qualified investors only. It does not constitute an invitation to invest in any of the funds mentioned in the report.EXANTE Hedgeweek Special Report Oct 2012 www.hedgeweek.com | 2
  • 3. Overview A one-click approach to accessing alpha By James WilliamsEXANTE is a unique integrated trading and fund platform infrastructure for self-use only. Our platform is thereforeoffering whose genesis grew out of a challenge faced more intuitive and easy to use in comparison to others.by its five managing partners. All of them came from a “We’ve made it our mission to design a first-classtrading background and shared a similar evolutionary infrastructure and view ourselves as a benchmark ofpath when working with different brokers and banks transparency in the financial services industry. The factglobally, developing algorithms and trading strategies. that our customers are running successful cross exchange As Gatis Eglitis, one of the managing partners, tells and asset class arbitrage proves that we are fulfilling ourHedgeweek, once they started to launch their own hedge mission statement because the business of arbitragefunds, they encountered a challenge: each time a new requires superior infrastructure and transparent execution.”entity was set up for proprietary trading it involved having Although not exclusive, there exists a quantitative/to set up new relationships with counterparties. Actually high frequency trading slant to EXANTE. This isgetting everything set up and structured was a timely, understandable given the managing partners’inefficient process; something that EXANTE’s managing backgrounds. Picking up on the trading challengespartners observed was also proving to be a problem for referred to earlier, Eglitis explains: “Every asset managerfellow friends running asset management businesses. faces an exhausting relationship establishing processes To meet this challenge, EXANTE was established with counterparties. They find themselves having toin March 2011. It received its licence from the Malta deal with multiple brokers and departments to negotiateFinancial Services Authority end-June 2011. Unlike commercial conditions, credit lines, risks and connectivityother fund platforms, EXANTE is an organic institution, issues. In some cases this process is so slow thatblending multi-asset fund support with first-class trade either market opportunities or customer assets startexecution services using a sophisticated technology flooding away.infrastructure. “This story is common to all managers that deal with Says Eglitis: “We know exactly what are the needs multiple asset classes like currencies, fixed income,of fund managers. We talk the same language, when commodities, stocks and futures. They end up jugglingthey ask for a service we immediately understand numerous platform providers, connectivity gateways, datatheir requirements because we’ve been in their shoes. vendors, and are forced to deploy a sophisticated buy-Similarly to grandma’s cookies which taste much side back office tool to calculate the portfolio NAV at thebetter than those from a store, we initially designed the end of each day.EXANTE Hedgeweek Special Report Oct 2012 www.hedgeweek.com | 3
  • 4. Overview hedge funds on such a platform. The fact that all the funds are listed means investors can rotate into and out of different managers as they wish, and actively manage their portfolios directly. They can either build their own fund of funds, or choose to diversify their risk and take broad exposure by investing in the index of managers which EXANTE is now building. “This allows investors to ultimately have full control of their investment, instead of depositing with a bank where risk is not transparent and the premium is close to zero,” says Eglitis. Secondly, all the funds listed on the system have gone through due diligence. That sets it apart from other fund databases which list funds, but cannot claim to have done due diligence on every one. “There are lots of funds that we have approached from various databasesGatis Eglitis that we cannot place on our system because we are reluctant to expose our customers to such managers. “So the niche to us was obvious: we couldn’t find What we offer is quality content,” states Eglitis.any broker giving quality DMA access to all markets and Third is the level of transparency it offers clients.instruments with competitive conditions, advanced STP People can see the performance and price of each fundcapability and real-time risk monitoring from one account. just like any other financial instrument. Going forward,We created the business for ourselves to overcome these Eglitis says the platform will provide full fund profiles andproblems and complexities, using the best technology allow users to filter their searches: either by geography,ingredients. Today we share this solution with our friends strategy, size of fund or other criteria.and asset managers facing similar challenges.” On manager selection, Eglitis stresses that the critical Trading and hedge fund listing are two separate factor is the ability to generate meaningful alpha. In thatcore offerings with EXANTE. The latter is a similar sense, EXANTE is not too concerned about the typesconcept to fund listing on an exchange with the sole of strategies on the platform, but rather their quality.difference being that it is done on a trading platform. On “What counts when assessing a manager is the auditedthe platform, hedge funds are treated similarly to cash historical performance chart as this shows past volatility.equities. For any manager wishing to join the platform, If performance is exceptional we make sure that there iswhich already includes a number of billion-dollar funds, nothing lying underneath the tip of the iceberg. If not, weEXANTE’s team works closely with them discussing the are happy to work with them and list their fund.”strategy in detail, and ultimately deciding whether the One interesting future development will be the creationmanager is good enough to list on the platform. of a ratings system for those managers listed on the EXANTE’s fund platform is potentially a game- platform. This, though, is not an immediate focus: ratherchanger for the industry. Currently, it has 35 investment it’s on building out the index. Eglitis explains how thismanagement companies, managing around 100 funds. is created: “We take the 20 top performers to currentlyThe one-point-click model gives investors the opportunity construct the index. Going forward, that figure will climbto invest directly in those funds. More importantly, for to 50, 100, as we look to develop a benchmark of tophedge fund managers they can trade fast and efficiently, performers across all asset classes. The managersacross asset classes, in addition to benefiting from chosen will be based on a series of quantitative andthe marketing opportunities that arise from listing and qualitative criteria such as year-on-year returns, Sharpepotentially attracting new investors. Ratio, Sortino Ratio, managers’ edge in the field, etc.” Anyone can view the funds. Potential new clients can Such has been the success of the underlyingsimply download a demo for free, familiarise themselves managers over the last two years that “If you hadwith the interface and the funds composing EXANTE’s invested in the EXANTE Hedge Fund Index in Marchindex, and decide whether to open an account or not. 2010, you’d currently be up 36.4 per cent,” notes Eglitis.Minimum investment, confirms Eglitis, is USD1million. Actual AUM on the platform is USD1.5billion. Looking ahead to the remainder of the year, Eglitis comments:Key platform features “We already have a pipeline of 100 managers. We hopeThe first point to emphasise is that no one else is giving to have 100 managers listed on the platform – includingqualified investors the opportunity to directly invest into the 35 existing managers – by the end of the year.” nEXANTE Hedgeweek Special Report Oct 2012 www.hedgeweek.com | 4
  • 5. M T G C a p i ta l m a n a g e m e n tVolatile markets play into the hands of multi-arbitrage shop “We really like risk-on risk-off and 30 per cent equity market neutral. The other 10 per markets. I personally think cent is weighted towards cash versus futures. The main this is going to continue geographical focus is Europe but with an office and staff for some time yet. The in China, Asia is becoming an increasingly important eurozone issue is not going market for MTG Capital. to be solved imminently The ability to constantly evolve and develop new and I expect to see a lot trading strategies is integral to the firm. Says Kaneps: of volatility in the future,” “We see the strategy moving deeper into equities and comments Andris Kaneps, bonds. The business can’t rely on one strategy; you have director of MTG Capital to constantly develop new ones.” Management. Last September, at the height of market volatility, Andris Kaneps The firm’s investment the strategy had one of its best months, returning 14philosophy is to generate positive long-term capital per cent. As the fund is trading market inefficiencies itappreciation by employing a multi-arbitrage systematic favours whipsawing markets.trading system developed by Kaneps and his small team. “When people ignore logic and run for safety, that’s Development of the strategy has been gradual. The when we start to make money. If you look at ETFsMTG Multi-Arbitrage Fund has been running since versus stocks, price inefficiencies tend to be quiteMarch 2010, but the genesis of the strategy goes back narrow in benign markets, but when the markets gosix years. As Kaneps explains: “We started out trading crazy they explode. Market volatility really helped us inarbitrage opportunities in FX markets. Then, towards the all our strategies last year from stocks and ETFs throughend of 2008, we decided to strengthen the strategy by to futures,” comments Kaneps.broadening it out to a wider range of asset classes.” MTG Capital is currently setting up an FSA licensed And with good reason; between November 2008 and investment manager to attract institutional money, but asOctober 2009 the NAV per share grew by 211 per cent. with all arbitrage strategies, the fund will remain capacity The algorithm MTG Capital developed now trades a constrained. “The next step is to get the fund to USD100-variety of markets and instruments, looking to exploit 200million. That AUM figure will allow us to remainprice inefficiencies in the same assets across different nimble and maximise alpha generation in the fund,”global exchanges. Typically these include: stocks, futures, concludes Kaneps. nETFs, and FX. Trading strategies include, among others:stocks versus ETFs, ETFs versus futures, exchange-listedand OTC instruments. Prior to launching the hedge fund the strategy wasquite high frequency says Kaneps, typically trading upto 1,000 positions daily: “We’ve kept the HFT part of 2012the strategy but we’ve also developed more long-termarbitrage strategies such as index arbitrage. We holdbaskets of index futures, sometimes for up to one week.” Since the fund’s inception it has generated an 2010impressive 154.6 per cent in net returns, averagingmonthly gross returns of 7.8 per cent. Last year, the fundreturned 68.07 per cent and is already up 36.48 per cent MTG Multi-Arbitrage Fundthrough July 2012. Having started six years ago with Sharpe Ratio 3.94limited partner capital, Kaneps and his team have built a Assets Under Management USD 26.31m Return since inception 189.38%USD25million hedge fund. “Our monthly notional turnover Percentage of positive months 100%is USD1.5billion, which gives you an indication of the Years in operation 2.5level of frequency we’re employing,” comments Kaneps. Strategy Multi-strategy Included in Yes In terms of style allocation, the MTG Multi-Arbitrage EXANTE Hedge Fund IndexFund is weighted 60 per cent towards futures spreadingEXANTE Hedgeweek Special Report Oct 2012 www.hedgeweek.com | 5
  • 6. Da Vinci Invest Trading faster than the speed of light… Hendrik Klein and his team The strategy currently trades six futures markets: three at Zurich-based Da Vinci index futures – the Dax, EURO STOXX 50, and SMI (Swiss Invest AG have been trading Market Index), and three interest rate futures – the Bund, futures on Eurex since Bobl (5-year German bond) and Schatz (2-year German 1995, using a sophisticated bond). “We want to expand beyond futures to cover news algorithm to track economic and events in other asset classes,” confirms Klein. indicators. In 2009, when “Certain events have certain impacts on specific Need to Know News brought instruments. We’ll look to therefore expand the range of out a computer-readable instruments we trade with time.” news feed, Klein immediately The Tachyon fund thrives off market surprises. If implemented it into the investment banks and economists get their estimations Hendrik Klein Da Vinci algorithm. The wrong, i.e. unemployment figures, that’s when theproprietary strategy that resulted was highly successful, strategy excels. “The markets are less predictable thangenerating nearly 14 per cent between August and in the past. Experts are becoming less accurate in theirDecember of 2009. estimates, which gives us opportunities,” says Klein. “If The following year it made modest gains of 7 per everything is in line, we don’t trade.”cent but amidst the volatile, event-driven market climate All trades placed by the system are short-term – justof 2011 the news-based trading strategy came into its a couple of minutes at the start and end of each day –own, generating an impressive 58.6 per cent: a total after which the portfolio reverts back to cash. Incredibly,return of 78.3 per cent since August 2009. On 1 June since August 2009 the largest drawdown has been2011, Da Vinci structured it as a fund: the Da Vinci K just 0.8 per cent. This underscores the strength of theSquared Tachyon Fund. The fund was officially launched algorithm Da Vinci has created.to external investors on 1 January 2012 and despite not Looking forward, Klein says they will market the fundbeing able to trade for the first five months because of externally, but not too aggressively: “We want to scaletechnical issues, the strategy is already up 17.7 per cent it, broaden the number of events we look at, and buildthrough July; generating 16.6 per cent in July alone. capital steadily. If we got to USD100million overnight the As its name implies, speed lies at the heart of the performance would decrease and there’d be less moneystrategy; ‘tachyons’ are sub-atomic particles believed to allocate. We’ll take our time.” nto be faster than the speed of light. That it uses analgorithm to scans news feeds for economic indicatorsto place trades makes the Tachyon fund a cross betweena global macro and an event-driven fund. Either way, it’s 2012the first fund of its kind. “We use special news feeds that try to optimise theirway from the source to the co-location: you need toco-locate your servers next to the exchange or datacentre to minimise latency,” says Klein, who says thatthe fastest order executed, to date, was 0.6 milliseconds. 2009“We currently have co-locations in Frankfurt and Chicagobut might expand to Moscow, London. But this strategy Da Vinci K2 Tachyon Fundisn’t just about speed and news feeds – the secret sauce Sharpe Ratio 2.06is the algorithm itself. We’ve spent years of research Assets Under Management USD 50mdeveloping its parameters.” Return since inception 172,42% What the algorithm is essentially doing is predicting Percentage of positive months 75,86% Years in operation 3how specific instruments will behave when a piece of Strategy Global Systematic Macro Event strategynews comes out. Although not definitive, there’s a high Included in Yesprobability the markets will move the way the algorithm EXANTE Hedge Fund Indexpredicts according to Klein.EXANTE Hedgeweek Special Report Oct 2012 www.hedgeweek.com | 6
  • 7. Wermuth Asset Management Consistency drives performance of WEELS fund “Delivering sustainable system which also generates signals telling the advisor value” lies at the heart of for how long a specific position should be held. For the investment philosophy at example, a ‘short’ signal might be two days, “medium” Wermuth Asset Management, would be up to one week, while “long” would be up to a German family investment one year. The system works for both long and short firm co-founded by Jochen positions in the book. Wermuth and Dr. Dieter “This helps to smooth net exposure. In choppy Wermuth with principal markets, short-term trading strategies are not as effective offices in Wiesbaden and as long-term holding strategies,” says Ilchenko. Moscow. In 2003, WAM Consistency of performance is very much the name opened up its Greater Europe of the game. The fund’s best performance came in 2009 Sergey Ilchenko Fund (GEF), which had been when it generated returns of over 50 per cent. To minimiserunning since 1998 with internal capital. Underpinning the drawdowns, Ilchenko explains that for every equityfund is a quantitative model that picks stocks by assigning position the algorithm uses an embedded call option. Thisthem a “long”, “short” or “neutral” tag. helps create positive skewness, meaning the strategy is Sergey Ilchenko, Head of the Quant Department, more likely to have large positive than negative returns.along with Yury Roslavlev and Tikhon Moiseev, advises Recently, the team started to use an FX hedge overlay.a spin-off version of GEF, called the Wermuth Quant Even though the fund was up 6 per cent in 2011 in dollarEastern Europe Strategy (WEELS) fund, which focuses terms, Ilchenko says it could have ended in negativeon Russian equities. GEF has been using the quantitative territory. “This is a true hedge and tends to be employedapproach since February 2012. only when there is a ruble depreciation. By using futures “In WEELS we employ a similar strategy to the Greater we are able to control downside currency risk.”Europe Fund. The main difference is that GEF uses 2x The fact that Russia’s stock market is prone toleverage. GEF can take up to 200 per cent net long and significant swings actually benefits quant funds like WEELS.60 per cent short exposure,” confirms Ilchenko. “As long as that continues we will try to make money The team developed auto execution software for from the ups and downs. One of the keys to our successtrading. However, it incorporates human analysis when is having a systematic strategy that is consistent overnecessary, benefiting from the macroeconomic expertise time,” states Ilchenko. nof Dr. Dieter Wermuth. “What differentiates the fund from other Russia-focused funds is that we combine fundamental analysis,which we use as a risk management tool, with technicalanalysis. For example, if a company’s stock price is 2012affected by market rumours, the quant model can’t detectthese. In such instances, we switch off trading. We’vealready done that a couple of times this year where 2005technical analysis is temporarily sidelined and a morediscretionary approach is taken,” explains Ilchenko. The WEELS portfolio only targets the most liquid Wermuth Leveraged Quantlarge-cap Russian stocks that can be liquidated within Eastern Europe Strategyfive days at most, but preferably within one day. Sharpe Ratio 1“We are limited to around 40 stocks in total,” states Assets Under Management USD 17mIlchenko, adding that the current AUM of the strategy is Return since inception 713%approximately USD17million. Funds that invest in Russia Percentage of positive months 61% Years in operation 7tend to be long-biased because Russia’s equity market is Strategy Russia Longundervalued; the costs involved for shorting are up to 10 Short equity Included in Yesper cent p.a. of the transaction value. EXANTE Hedge Fund Index Entry and exit points are decided by a trend-followingEXANTE Hedgeweek Special Report Oct 2012 www.hedgeweek.com | 7
  • 8. Q u a n t u m B r a i n s C a p i ta l Applying evolutionary ideas to algorithmic trading Gregory Fishman is one which uses pattern recognition to trade. of the managing partners “Yes, we view the financial markets as if it were of Automated Intelligence any other ecosystem. If you go to a forest you’ll find Systems, an independent an ecosystem and you can build lots of parameters to scientific institute established model it: we’re applying a similar approach to the stock in Saint Petersburg in 2006. markets. Every idea we develop is based on evolutionary The team, which comprises systems. It’s basically artificial intelligence: our algorithm some of the top Russian is like a robot that can trade the markets and think for minds in mathematics, itself,” explains Fishman. physics and IT, takes its The strategy trades Russian stocks, derivatives, the inspiration from nature. FX spot market, and also trades Russian paper on the Gregory Fishman By studying complex London Stock Exchange. Fishman believes that once theecosystems, and how they evolve, they have developed strategy is established into a hedge fund structure it willa sophisticated algorithm based on artificial intelligence have an initial short-term capacity of USD500million.to trade the financial markets. For any HFT platform, speed is important but as Evolutionary theory, says Fishman, is “one of the Fishman points out: “We have co-locations in Moscow,methodologies we use to decide what is reasonable to London, Frankfurt, New York and we also have partnersresearch and what isn’t”. In a similar fashion to David in Chicago. Latency is important but is not critical. TheHarding’s Winton Capital, which famously takes a rigorous algorithm itself is the critical point. This is the competitivescientific approach to the markets, AIS has applied its edge that we have.”collective expertise to build, in effect, a sentient algorithm The fund will be called Quantum Brains Capital:that evolves as market conditions change. appropriate given that the brain remains one of the This has allowed Fishman to build an incredibly strong most complex systems to fathom. “We plan to targettrack record of performance, delivering significant returns annualised returns of 30 to 70 per cent in the fund. Ourdue to the small amount of proprietary money that has, to advantage is having a strong IT team, all of whom comedate, been traded. The strategy – a high frequency trading from the University of Saint Petersburg, and a strongplatform – now trades with USD10million. science team all of whom came from the top technical “We made some algorithms to do high frequency Universities of Saint Petersburg and Moscow.” ntrading. The main algorithm is based on lots of mathsand physics, a mesh of ideas. That’s our core strength:designing complex systems using a framework of maths,physics and IT. Each idea does something different, but 2012they are all connected,” explains Fishman. As mentioned, the strategy currently uses proprietarymoney to trade, although there are now plans to openit up to external investors. So successful has thealgorithm been in recent times that last year AIS wona competition hosted by Micex RTS (Moscow stock 2011exchange) as the best trading strategy, netting FishmanUSD30,000 in prize money. Quantum Brains Capital Fund “Our daily trade turnover is about USD1billion, roughly10 per cent of the Russian market turnover,” confirms Sharpe Ratio 7.37 Assets Under Management USD 14.2mFishman. “Between September and December 2011 we Return since inception 184,66%publicly made 8000 per cent.” Percentage of positive months 100% Years in operation 1 The team at AIS essentially views the financial Strategy Adaptive Statisticalmarkets as an ecosystem; an organism that self- Arbitrage and HFT Included in Yesregulates, adapts and evolves. It’s the ability to find EXANTE Hedge Fund Indexpatterns in nature that has helped build the algorithm,EXANTE Hedgeweek Special Report Oct 2012 www.hedgeweek.com | 8
  • 9. Courant Asset Management The anti-emotion approach to stock trading Dr. Anton Dudoukin and data. One of Courant’s key differentiators compared Dmitry Dudoukin are to other similar funds is this disciplined approach to partners in Courant Asset research and risk management. If the team doesn’t like Management Ltd. Courant elements of the strategy that worked a year ago, but Asset Management is not today, it conducts new quantitative research, draws the managing company conclusions and then decides how best to implement of Courant Fund. new ideas. Current Fund’s AUM is In that sense the strategy constantly looks at what USD28.7million. Courant was done in the past to decide how best to trade in the Fund is an equity long/short present. Everything is constantly evaluated to ensure the strategy that uses systematic model is successful. Dmitry Dudoukin short-term trading models. “Everything is 100 per cent systematic in our trading. The strategy was first developed back in 1998, but it Nothing is done on emotion. We are anti-emotion. That’swasn’t until June 2007 that the decision was made to why people invest their money with us,” states Dudoukin.structure it as a hedge fund; that year, between June and The strategy’s best performance came in 2009 whenDecember, it returned 13 per cent. Courant then started it returned 34.8 per cent. Most of these gains came fromaccepting external investors from 2008 onwards. short positions says Dudoukin. The market was very “Our average annual returns over the last five years choppy, causing stocks to climb for a few days then fallare 16.15 per cent. We were rated number seven in the again, which played straight into Courant’s hands. Thetop ten equity long/short category for best performance strategy tends not to favour markets that move slowlyover the past three years by BarclayHedge: generating or have low volume, which has by-and-large been thethree-year compound annualised returns of 28.27 per case in 2012: the fund is currently near flat, up 0.03 percent,” says Dmitry Dudoukin. The BarclayHedge report cent YTD.was published in the second quarter of 2012. “It’s normal for the strategy to be flat for a period The Courant fund trades a universe of roughly 2,000 of time, like this year, because we need volume andof the most liquid large-cap stocks in the US market movement in the market. We need investors to be active,and uses a countertrend strategy to buying and selling which right now they aren’t.” nstocks. “We use proprietary statistical scanning modelsevery day to scan the market for low-price stocks to buy(in a falling market), and high-price stocks to sell (in arising market),” explains Dudoukin. What makes this strategy so compelling, given that 2012last year it generated returns of 27.95 per cent, is thatit uses no leverage. Net exposure ranges from -100 to+100, meaning gross exposure at any given time neverexceeds 180 per cent. 2007 “We use value signals and number of technicalindicators in the statistical model to identify which stocksto buy and sell on a short-term basis. We buy stocks thatare falling, and if they continue to fall we buy again: we Courant Funddo this up to four times for certain positions using 2 per Sharpe Ratio 0.7cent of the fund’s NAV. Assets Under Management USD 28.98m “The maximum exposure for a single long position in Return since inception 114,38%the fund is 8 per cent of the fund’s NAV. For shorts, the Percentage of positive months 70,97% Years in operation 5biggest exposure for any single position is 6 per cent,” Strategy Statistical Stocks Long/Shortsays Dudoukin. Included in Yes Research lies at the heart of the operation. For every EXANTE Hedge Fund Indexhour of daily trading, seven hours are spent analysingEXANTE Hedgeweek Special Report Oct 2012 www.hedgeweek.com | 9
  • 10. B i tco i n The emergence of electronic gold…? “I hope our fund will be the first hedge fund to take advantage of using Bitcoins,” explains Anatoliy Knyazev in Moscow. One of Exante’s managing partners, Knyazev confirms that the firm is currently in the process of structuring the fund, with a view to launch this autumn. Anatoliy Knyazev Bitcoin is a decentralised, digital currency that couldrevolutionise the world of payments. It refers to boththe open source software used to trade the electroniccurrency, as well as the currency itself. An anonymousgroup developed the concept in 2009, publishing a whitepaper that detailed the crypto-currency algorithms andproof of how Bitcoin worked. As Knyazev explains: “Bitcoin is basically an electronicversion of cash, or gold. Each user has a file on thecomputer representing their wallet. It has a unique publickey which you use to send and receive money.” In orderto use received Bitcoins, the user needs to have the Bitcoins, whose value should increase over time as moreprivate key that matches the public key the Bitcoin was users mine them.received with. “We will hold the Bitcoins securely in a Swiss vault Bitcoins function the same way as cash: every over a period of three, five, 10 years. The fund will be atransaction made is irreversible, and if, for whatever regulated entity through which institutional investors willreason, the Bitcoin wallet is lost, there is no way of be able to access the Bitcoin market,” says Knyazev.retrieving it: “What’s lost is lost, what’s transferred is As the rate at which Bitcoins are added to the systemtransferred,” says Knyazev. is controlled, it means that the more people mine, The Bitcoin system is peer-to-peer. All transactions the less they will get: at a rate of 50 Bitcoins a day,are visible, and by using cryptographic algorithms Bitcoin one person mining can get all 50 Bitcoins. However,is able to verify every successful transaction. What this if 50 people are mining, the most they’ll get is onedoes is build an ever-growing chain of transactions, Bitcoin, and so on. The higher the numbers, the moreallowing users to see where Bitcoins have been traded. competitive it’ll become. It’s still early days for Bitcoin, which remains a “The system will peak at 21 million Bitcoins in 2020.highbrow concept. However, one of the features that Right now, in terms of where we are on the curve,could prove critical to its success is in-built deflation. around one half of the Bitcoins have been mined globally.This is because the rate at which Bitcoins arrive into The rate of circulation is higher in the early stages andthe system is pre-determined. That rate follows a pre- slows down with time. So even though it’s only takendetermined curve, which will drop at a future point three years to mine half of the Bitcoins, it will takecausing the inflow of new Bitcoins to reduce. another 10 years to mine the remaining half,” explains “With Bitcoin you have a process called ‘mining’, Knyazev.which involves the accrual of Bitcoins. To mine at a The niche fund strategy plans to launch with aroundsignificant rate one needs custom designed hardware EUR1million and Knyazev is excited about its prospects:with GPUs or FPGAs,” says Knyazev. This lies at the “As soon as Exante’s clients hear about a smart newheart of Exante’s investment strategy in the Bitcoin fund: idea they tend to want to get involved. We are confidentto raise assets in US dollars and euros and purchase this will be the case with the Bitcoin fund.” nEXANTE Hedgeweek Special Report Oct 2012 www.hedgeweek.com | 10
  • 11. P l at i n u m Pa r t n e r s Spirit of entrepreneurism delivers cumulative returns of 480% “I like to describe Within the PPVA fund, long/short equity accounts for ourselves at up to 20 per cent of the risk allocation, with three quant Platinum Partners as strategies, three energy-focused portfolios and two Asian entrepreneurial traders. trading strategies accounting for another 40 per cent; the We select and promote direct lending strategy is between 10 and 12 per cent. entrepreneurs who Although mindful of the challenges of increased have an understanding correlation within global equity markets, Landesman of how to structure says that the current team of four managers is about to transactions in a way become five, with a clear emphasis on telecoms, media that caps the limit to and technology (TMT): “The new hire will be a media the downside while expert,” says Landesman. Mark Nordlicht & Uri Landesman giving us all kinds of Last year’s performance – up 21.03 per cent – wasupside opportunities,” says Uri Landesman, president and largely thanks to the special situations side of the book,managing general partner of the New York-based firm. says Landesman: “One strategy, which we call physical Platinum Partners was started by Mark Nordlicht in commodity arbitrage, is with a 71 per cent stake we2003. Nordlicht’s background was in trading natural gas own in Black Elk Energy, a private oil and natural gasvolatility. He also specialised in making senior secured producer in the Gulf of Mexico; this enjoyed a fairlyloans to private companies. These two strategies are still significant write-up last year. The other big contributorused by Platinum today in its flagship multi-strategy fund: was our event-driven healthcare basket, specifically anPlatinum Partners Value Arbitrage fund. investment in biopharmaceutical firm Navidea.” Since 2003, the fund has built an enviable track record, Landesman confirms that the PPVA fund’s two event-generating average annualised returns of 20.13 per cent – driven baskets are set to become three: event-drivenoutpacing the firm’s target of 15 per cent annualised. Its healthcare, event-driven energy, and ‘event-driven other’:best performance to date came in 2007 when it returned which covers all other strategies, particularly those focused53 per cent, which Landesman attributes to a number on China. “The main theme we’re playing over the long-of factors: “Three of our underlying strategies had their term in China is the transition of the lower classes tobest ever years, no single strategy underperformed, middle class and taking advantage of their increasedand also we started that year with a relatively low purchasing power.” YTD the PPVA fund is up 8.20%. nasset base, which meant the gains we made had a bigimpact. The best strategy was volatility trading in naturalgas. Uncertainty in the markets allowed us to set upsome trades that created a tail-risk for free and made 2012impressive gains,” confirms Landesman. The PPVA fund accounts for USD700million of thefirm’s USD1.125billion in AUM, and as Landesman says,one of the hallmarks of the firm’s success is the abilityto swing back and forth across different strategies. “We 2003are completely focused on risk-adjusted returns. That hasenabled us to deliver returns of over 20 per cent net of Platinum Partners Valuefees to investors, along with a high Sharpe Ratio (3.31). Arbitrage FundWe try to avoid correlation between strategies at all times.” Those strategies range from long/short equity, event- Sharpe Ratio 3.31driven, energy arbitrage, asset-based convertible debt Assets Under Management USD 1.1bn(direct lending), volatility arbitrage to physical commodity Return since inception 480,33% Percentage of positive months 88,7%arbitrage. “Portfolio Managers who get turned away from Years in operation 9.5box-ticking institutions find a home with us. Over the Strategy Multi-strategylast decade we’ve built a reputation as the place to go, Included in EXANTE Hedge Fund Index Yesparticularly for idiosyncratic strategies,” says Landesman.EXANTE Hedgeweek Special Report Oct 2012 www.hedgeweek.com | 11