German fund finds value in high-volume equity trading

As a man who was once the youngest specialist trader on a German stock exchange, Johannes Minho Roth, partner, co-founder and head of trading operations at Five T Capital, is one of those rare cases of a person who has fulfilled early potential and become a successful player in the financial markets.

In 1999 Roth began as a floor trader on the stock exchange in Germany and continued as a trader until 2006. He was a specialist market trader and also ran a proprietary trading book for Baader Wertpapierhandelsbank, one of the largest market makers in Germany.

As a trader he was gaining vital experience in the German market as well as trading foreign stocks listed in Germany, but since he was 17 Roth had wanted to start his own hedge fund business. In 2006 he believed it was the right time to do it.

"What I was doing for Baader Bank was a purely trading orientated style. As a team the volumes traded were incredibly high and not much time was dedicated to looking at fundamentals. So I worked out that there would be a better risk/reward ratio if you still made a lot of trades but if you combined that with fundamentals research, as it is important to do some homework and avoid those bad trades," says Roth.

The 'FiveT' in FiveT Capital was taken from Jesus's parable of the talents found in The Bible. In this story the first servant was given five talents and made five more talents. Hence the 'five' and 'T' for five talents. The fund was established in summer 2006. Roth recruited some of his ex-bosses from Baader as day-one investors. Although not happy he had left the bank, they were keen to cash in on the trading style ideas he had.

Roth also called up some friends he knew had made similar moves into alternatives and asked for advice about setting up a hedge fund. "It ended up being pretty easy with all their useful contacts for prime brokers, administrators, etc," adds Roth.

The FiveMore Fund was launched in February 2007. It now has EUR61.4 million of assets under management with 62%-64% accumulated returns net of fees since inception (at September 30, 2008). The appeal of the fund, believes Roth, is that the team knows how to trade equities, particularly German equities.

Roth's experience in the German equity markets gave him the skills needed for high-frequency trading. "If you do this you begin to know a lot of counterparties on all the trading desks and what trading patterns to look for. That is why the strategy was very easy to implement. Basically we are doing what we did before but in a different institution with better order flow quantitative tools and more concise fundamental research," comments Roth.

"In 2008 we are up approximately 9.29% after all fees. The projections are 15%-20% a year - a figure that we are comfortable with targeting," he adds.

Roth's stock-picking approach is done through both order flow analysis and bottom-up research. The order flow analysis identifies which sectors are working and which are not. Then the team researches the micro view "to look at what is behind these companies, what is behind the balance sheets and whether they are strong or not. Only if we agree on both ends of the analysis does it become a buy or a short," says Roth.

The percentage of long to short positions can change at any second of the day. The team trades the net asset value equivalent of the fund once a day and on average Roth estimates the fund trades that amount 150-200 times a year.

There are two trading buckets within the FiveMore Fund. One is super short-term, intra-day or overnight trading. The other is a core positions book where the team puts on longer-term bets on the long and short sides. At present around 70% of the fund's assets are in the short-term bucket and 30% of the portfolio in core positions.

Roth's view of the German market is that it is tied to anything that is happening in the US. There is a high correlation. The worst in economic news and corporate earnings news has yet to come, believes Roth, although he thinks the bottom of the German equity market will be here in the not-too-distant future.

Germany has historically been a big gainer because of its high level of exports and will look to profit from that trend. However, because a lot of companies have high earnings sensitivity to the dollar (for example, BMW and many other car companies), he expects some problems. So overall there are some industry problems that are going to pick up momentum. "We hope to be opportunistic and collect some of the upside," says Roth.

Some aspects of the car industry are interesting for the fund, says Roth. He believes the dollar has bottomed and because of this there are some trends likely to help the industry prosper, such as advances in technologies.

There are also opportunities in the banking sector, not necessarily just in Germany. Long only will have to move into sector. "I see significant recovery in the banking sector. However, here we prefer companies that have a well-operated savings and loans business," says Roth.

On the short side Roth predicts the agricultural trend has definitely come to an end.

There are a lot of regulatory risks that have to get priced in, for example, the fertiliser sector. Roth believes the margin extension story is not sustainable and potash prices will go down.

Fundamentals of fivemore fund

Name of manager: Johannes Minho Roth

Full name of fund: FiveMore Fund Ltd

Address of advisor: Kasernenstrasse 11, 8004 Zurich, Switzerland

Contact: Viktor Paul Pospiech (; +41 43 3222 5 10)

Launch date: February 1, 2007

Portfolio size: $84 million (all share classes)

Average annualised return: +33.89% (end September 2008)

Average annualised volatility: 17.8%

Share classes: euro, US dollar

Administrator: Equity Trust Fund Services Luxembourg

Auditor: PWC

Prime broker: Merrill Lynch International

Domicile: Cayman Islands

Listing: no

Management/performance fee: management fee: 1.5%; performance fee: 20%

Minimum investment: ^R100,000/$250,000

Lock-in/up: no lock-up

Redemption period: 30 days.

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