Making the most out of the diversity of managed futures strategies is a key focus of the HI Varengold CTA Hedge. It does this by combining several managed futures and liquid global macro strategies in the portfolio with a more flexible approach than is typical among fund of hedge funds.
Manager selection and strategy allocation is mainly undertaken by Varengold's investment committee which subdivides the investment strategies into five major categories. These categories are trend following, which in the current year's strategic asset allocation is weighted between 30% and 65%; short-term trading, weighted from 15% to 35%; global macro with the same 15% to 35% weighting; and FX and discretionary trading up to 15%. The fund holds a cash quota of between 2% and 12%.
Targeted at professional and institutional investors who are able to see both the risks and value of the portfolio, Varengold recommends the HI Varengold CTA Hedge as an addition to rather than a core element of a portfolio.
The portfolio structure is intended to be representative of the managed futures universe; the trend following, short-term trading and global macro sub-strategies will therefore be permanent components of the portfolio.
Post 2008, the tough economic environment and stock market rises beset by uncertainty have seen Varengold increase its exposure to short term trading strategies even beyond the strategic allocation band to over 36%.
Short term traders are not dependent on medium to longer term trends and can trade in up to 220 different markets. They are more focused in terms of markets and very often high frequency and therefore always systematic. The focus is on extremely liquid markets so as not to exert a market-influencing role.
Sebastian Schäfer, global head of sales at Varengold, explains 2009 has been a challenging year for trend following and the global macro strategies. Short-term trading and discretionary styles, on the other hand, have worked well for the portfolio, with discretionary producing twice the returns of the short-term traders.
"We have been helped by our ability to move into strategies and managers which can profit from this type of environment early enough. We give ourselves more flexibility in the asset allocation and can and do adjust allocations more often than the typical fund of hedge funds. We are opportunistic in our approach and want to bring manager and sub-style weights in line with the opportunities the market provides."
Operational risks are minimised by only investing in managed accounts. Originally this was with Lyxor but has been spread to other platforms and Varengold is also launching its own managed account platform in early 2010 to be able to add more short-listed managers to the portfolio and reduce cost.
Using managed accounts gives investors added security and transparency, says Schäfer. "We have always done our own due diligence to select the best range of available managers and never relied on the platform alone. Still, using external platforms adds another layer of manager due diligence which is appreciated by clients but can be limiting to the asset manager if recommended managers are not being added. The transparency and liquidity that using a platform and managed accounts in general brings are key ingredients in our portfolio management processes."
The method by which the Varengold investment committee selects the underlying managers for the fund differentiates the group from its peers, says Schäfer. Starting with a quantitative screening and analysis of large pool of managers, from which is produced the Varengold Intermediate Report, the process then moves on to a second more qualitative stage.
"It is here that we do things differently from the rest of the market. We have the manager answer our tailor-made due diligence questionnaire - not the standard AIMA questionnaire - a quarter of which contains what we would call tricky questions, ones that don't necessarily have a right answer but which get the manager thinking and give us an insight into the thought processes and research and development that went into his portfolio construction systems.
"The investment committee members undertake the manager analysis, assessing the quality of the managers systems, processes and research & development at senior management level right from the outset. We would rather have our experienced investment committee members talk to a smaller number of managers and do things on a different level, than have junior analysts undertake the task by ticking boxes," explains Schäfer.
"We then apply an additional due diligence questionnaire which is run on multiple discretionary models, which helps us in the final decision making process."
In selecting the manager, Schäfer points out that Varengold does not look to optimise portfolios from a statistical point of view but rather to build robust portfolios. Qualities that the bank looks for in managers include robustness, thoughtfulness, the ability to adjust, top percentile performance and a focus on research and development.
Over the years, this policy has led to a select list of more than 30 approved managers of institutional quality used to create diversified or concentrated mandates with 100% managed accounts.
FUND FACTS: HI VARENGOLD CTA HEDGE
Full name of fund: HI Varengold CTA Hedge
Name of portfolio managers: Lukas Diehl, Yasin Sebastian Qureshi and Steffen Fix
Name of investment/management company: Varengold Wertpapierhandelsbank AG
Contact: Sebastian Schäfer, Grosse Elbstrasse 27, Hamburg, 22767, Germany (+49 40 66 86 490)
Launch date: January 2006
Assets under management: $71.3 million
Annualised return: 9.41%
Annualised volatility: 8.17%
Strategy: managed futures
Share classes: euro
Administrator: Hansa Invest
Management fee: Class A: up to 1.31% annually; Class B: up to 2.01% annually; Class C: 1%,
Performance fee: 20%; Class C 10%
Minimum investment: Class A: €500,000; Class B: €1000; Class C: €5m
Redemption period: weekly