Hedge Funds Review European Single Manager Awards 2016
Thirty years on from being one of the three co-founders of AHL, Martin Lueck is still a passionate advocate for managed futures/commodity trading adviser (CTA) hedge funds. At the heart of his enthusiasm is a conviction that it is possible to offer investors a better way to identify and capture trends and ignore market noise.
Standing out as a managed futures/CTA hedge fund is not easy, admits Lueck, research director and president of Aspect Capital. "This is a competitive space. We can rue how competitive it is but surely that's a good thing for investors," says Lueck.
Aspect, along with other managed future funds, has benefited from the diversification of the industry. Managed futures/CTA strategies are now an important component of investor portfolios, from sophisticated institutional investors to retail.
For Aspect, the vision that was at the centre at creation has not changed. Research remains crucial to Aspect, helping to improve performance across the board and retain its competitive position.
Starting with AHL in 1987 and then setting up Aspect in 1997, Lueck has witnessed the evolution of markets. Since the early days of AHL, the futures markets have expanded enormously to include a huge diversified range of instruments. The market has moved from open outcry to hyper-fast electronic trading. Throughout this process, the systematic models at the heart of managed future programmes have adapted to the changing paradigm, says Lueck.
Anthony Todd, co-founder and CEO of Aspect Capital, who is in charge of market oversight, model and operational risks and business development, agrees with Lueck. "Markets do evolve. We believe the range and liquidity are increasing as the costs are diminishing. Our view is that the alpha we generate is subject to erosion and decay. It is crucial that the programme is constantly evolving, that we are refining the programme to enhance returns. Otherwise, we would die," notes Todd.
Finding differences between the programmes offered by managed futures funds may appear daunting. There are consistent themes that are present in all the core competitors in some form within medium-term trend-following models, Todd believes. However over the last three to five years, there has been significant deviation and the correlation between strategies has decreased significantly.
"We do medium-term trend following. We have a consistency of approach," says Todd.
In 2012-13, it was difficult to avoid style drift. It was a challenging time and many strategies looked at different ways to gain alpha. There were some who believed systematic trend following was at an end.
But, as Todd points out, this was not a new situation. It had happened before and was a natural characteristic of markets.
By 2014-15, trends had come back to the market and the debate about the value of managed future funds had moved on again.
Another common theme important to the top managed future funds is research and development. Aspect has more than 70 people employed in this area alone.
"Because of our belief in the evolution of markets, coupled with the competitiveness within the sector, it is crucial to refine and add to the models to protect and enhance returns," says Todd.
Over the years, market behaviour has not changed that much, believes Lueck. Quite often following a financial crisis there is more government intervention and risk aversion by investors.
However, market trends are episodic and unpredictable. To respond to this, Aspect believes it is important to be consistent in the investment approach and to stick to the model, waiting for trends to return.
There is no doubt markets have changed over the years, mainly for the good of funds like Aspect, notes Lueck. In the beginning, programmes were very much commodity-centric, expanding into foreign exchange, stock indexes and fixed income, widening the geographical reach to include emerging markets.
The effects of the Dodd-Frank Act on what had previously been peer-to-peer bank contracts have also helped change the industry. Aspect expects to add centrally cleared contracts to the programme, such as interest rate swaps in a broader range of geographies.
"There are all kinds of new and interesting derivatives. The idea is to make sure there is adequate liquidity and you are not taking risks you did not intend to take. One of the features of this strategy is the liquidity it affords investors," says Lueck.
But maintaining weekly or daily liquidity is a challenge, as the expansion of opportunities and the range of instruments available grows. There are a number of countries and instruments Aspect is keeping a close eye on as a source of future diversification, but at present there are regulatory or taxation hurdles that mean these cannot yet be added to the programme.
Todd is also anxious to knock on the head any notion that managed futures is crowded as a strategy. Even though these funds trade the world's most liquid markets, many believe there is overcrowding in trades. To refute that notion, Aspect built a naïve model of the entire managed futures sector and applied it to a core 60-70 markets that CTAs are trading. The resulting analysis showed the potential impact of the entire universe was minimal. There was no evidence of crowding in trades. While there was some impact on futures, that was before taking into account the underlying liquidity in swaps, options and cash markets.
Lueck is keen to point out that Aspect, like many managed futures funds, is both a taker and provider of liquidity to markets. "We've never viewed ourselves as only liquidity takers. Investors need to be aware of the nature of these models. We don't keep buying in up markets and selling in down ones. It is based on more subtle dynamics," he explains.
For example, in 2014 the model got hold of an unpredictable down trend in oil and built slowly and carefully on that trend. When the market was dropping fastest, the programme began buying back and providing liquidity. "It is not a one-way feature," says Lueck.
The idea is to be patient. The goal of execution is to be as cheap and invisible as possible, finding pockets of liquidity rather than chasing after it. As banks exit foreign exchange business, there will be a decrease in liquidity levels. But foreign exchange is the world's most liquid market. Lueck expects this will not impact the relatively small transactions Aspect represents in this market.
Of course the legacy of AHL is constantly with Aspect Capital. This experience of trend-following models is perhaps more valuable today than a decade ago.
Over the last few years there has there been an increasing acceptance of medium-term trend following. "Suddenly over the last four to five years everyone wants to access [managed futures]. Trend following is centre stage," says Todd.
More investors believe adding managed futures to a portfolio gives added liquidity and is a source of diversified returns.
"After 30 years of ‘missionary work', there is now broad acceptance of the utility and importance of systematic trading strategies and managed futures within that. I feel cautiously optimistic that investors understand the utility of it in a portfolio," continues Lueck.
But it takes time for people to get used to a strategy that is not trading stocks or bonds, he adds. "Our mantra is consistent allocation in a portfolio because if an investor is constantly changing allocation, it undoes its effect," says Lueck.
Todd and Lueck believe experience is important in differentiating between the various managed futures programmes. "There are many pitfalls and traps to fall into while researching and building a strategy. It is a benefit to have the experience of Martin. There is huge value in differentiating ourselves against the newer competition," Todd adds.
Whether an investor is self-managing a single retirement portfolio or running a sovereign wealth fund, Todd and Lueck believe investors are attracted to strategies that have done well over a period of time. Many remain nervous about systematic methodologies and tend to use performance statistics as the metrics for choosing a manager.
"Our experience and longevity points to the confidence [of investors]," says Lueck. "We've run these models through strong and less strong market periods. We have the experience."
Todd believes experience was particularly important during the tumultuous 2012-13 years. Aspect stuck to its convictions while some other managed futures programmes moved away from trend following.
Another differentiator, Todd believes, is the level of transparency Aspect provides its investors as well as the strong long-term partnerships it has built up over the years with investors.
These are important factors in the success of the company, which now runs more than $6.3 billion through multiple strategies that identify and exploit directional moves in a broad range of highly liquid global financial and commodity futures, currency forwards and other derivative contracts. To illustrate this Todd points to a mandate Aspect recently won, beating strong competition. The deciding factor, he says, was the level of transparency Aspect provided investors.
While Aspect has remained true to its roots, it has not been static. While delivering return streams from medium-term trend following programmes is still at the centre of the philosophy of the company, Aspect has diversified the strategies, leveraging infrastructure more effectively and acquiring high-calibre sources of return.
The aim is and continues to be to create a world-class, broadly diversified systematic manager.
"When we started we had a passionate belief that medium-term trend following needed transparency and needed to be in an investor's portfolio, institutional or retail. That process of educating, of working with investors to help them appreciate what we're doing and how it fits into a portfolio, how it provides diversification – and stay with it consistently – is the history of Aspect," says Lueck.
"It's not about selling and getting assets under management. It's about building strong relationships with investors, having clarity about how and where we are enhancing the programme," he adds.
Todd and Lueck also believe a great deal of Aspect's success has been in its ability to recruit talent. They both emphasise the importance of building a strong culture that attracts skill and keeps people with Aspect over a number of years. Aspect offers sabbaticals to employees every 5 years with the company. There are a growing number of these requests, for 10 year sabbaticals, notes Todd.
The culture is collegiate and open, says Lueck. People do not work in silos. "We want to recruit people who want to be part of a team," says Todd.
When choosing new members for the team, Lueck is looking for the right mix of intellectual curiosity and honesty. "In developing systematic programmes, you can find some data that leads you to draw a conclusion you want but sometimes is just not there. People need to be robust enough to take criticism and in the spirit it is intended. We are very much a result of that culture of openness, honesty and collegiate approach. I have great confidence Aspect will have a long and glorious future after Anthony and I are walking around with Zimmer frames," says Lueck.
Aspect Diversified Programme was the winner of best managed futures/CTA hedge fund at the Hedge Funds Review European Single Manager Awards 2016.
The week on Risk.net, December 2–8, 2017Receive this by email