Identifying investor preferences

Giovanni Beliossi talks to Cate Rocchi about assessing risk for increased and sustained returns

If performance is a good judge of a hedge fund, then you can't fault First Quadrant's European Market Neutral Fund. Launched in August 2000 with $27m of institutional seed capital, it has returned an enviable 17.67% net during the past year, a year which has been rockier than most to say the least. And now for the first time the fund is opening its doors to new investment. Antiope European Market Neutral fund invests in European mid and large cap stocks using a similar quantitative strategy to that which has been developed by First Quadrant since 1991 in the US.

That firm was established in 1989 in the US and is one of the world's largest quantitative managers. With $15bn under management ($3.5bn of that invested in market neutral and hedged strategies), it still trails others in the sector such as Man Investments and the world's biggest quant players ' State Street and Barclays Global Investors.

'What we try and do is identify predictable patterns in the way in which investors favour a certain type of stock,' says London-based fund manager Giovanni Beliossi.

'Our approach is to recognise that stocks have features which go beyond belonging to an industry. When stocks go in and out of favour because their style (value, growth, large-cap and so on) goes in and out of favour in a predictable way, we capitalise on that. For example, when people talk about value stocks they are referring to stocks with certain characteristics such as low price to earnings. We employ a more sophisticated definition of styles: a stock can belong to one or more styles at the same time.

'Commenting on the current investment climate, value stocks with high dividend yields have been very sought after in this type of market environment. Contrary to what one would say according to a 'traditional' style breakdown, these stocks are currently also momentum stocks. Examples include UK supermarket chain, Tesco.'

He says the First Quadrant forecasting models reveal which stocks are 'fashionable' and maybe overpriced and vice versa. Beliossi admits this does not always work, but there have been clear themes over the years which his fund has prospered from. 'In the first three months of this year, apart from January, there was a strong value tilt,' he says. 'Then in April to the beginning of May, there was a slant on the more aggressive growth stocks. Following that, stocks with low earnings' volatility and high dividend yields were favoured.'

Beliossi stressed the technique was not the so-called 'black box' type of investing. He conducts top-down market analysis, with a one-to-three-month time horizon, which is then translated into a number of First Quadrant models.

About 400 European stocks are then fed into the models to highlight potential investments. He says: 'Top-down analysis is not something that is decided day to day and, although we constantly monitor investments, you have to resist the temptation to tweak the models repeatedly.' Top-down research takes into account such factors as interest rates, inflation, unemployment figures and the depth business cycle. He argues, in some ways, you can explain market behaviour statistically. His European model stretches back to the mid-1980s for historical comparison.

How do you factor in a disaster such as 11 September? Beliossi says: 'We are sector neutral and I am happy to say that our positions' volatility was actually lower than before the accident. Once we take care of risk managing our positions, what the market does is irrelevant to our fund.'

For the month of September the fund was up 2% after fees. He says: 'Our ability to pick stocks intra-sectors, on the basis of their quality and on their perceived ability to deliver less risky cash flows in the form of high and sustainable dividends, and on the basis of the current worldwide aversion for stocks with volatile earnings, was what determined our success that month. This was achieved with minimal ' and any case unintentional ' active net sector exposure. Our most successful long/short intra-sector pickings were in telecoms stocks, especially in the UK.'

There are about 70 stocks in the short portfolio and 70 in the long book of the fund. Going forward Beliossi says: 'Investors will prefer hard cash in the form of reliable dividends and steady earnings, consequently they will penalise stocks which have more volatile earnings. Furthermore, the price of oil may lead to unpredictable consequences. Due to the uncertainty of the political situation even stocks which look the steadiest may be harmed by the price of oil.'

The fund is domiciled in Dublin and has a minimum investment of $500,000.


Antiope European Market Neutral Fund

Fund: Antiope European Market Neutral Fund

Group: First Quadrant

Manager: Giovanni Beliossi

Performance: Since launch in August 2000, net return of 17.67%

Size: $27m

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