1. The Hedgeweek Interview: Melissa Hill, Managing Partner, Sabre Fund Management Ltd: Focusing on the quest for alpha generation

Melissa Hill outlines recent developments at Sabre, including new hire Matthew Isherwood and expansion into new markets such as Japan.

HW: What is the background to Sabre?

MH: Sabre specialises in quantitative equity strategies and is a firm well known in London having been one of the pioneers of alternative investments in the early 80s.     

The business is privately owned and managed by two partners - (myself) Melissa Hill and Dan Jelicic.  As Managing Principal, I am the partner with overall responsibility for business development and strategy, legal, operations and compliance.   Dan Jelicic heads up and drives the investment process, being the architect and lead portfolio manager of the Style Arbitrage strategy.  Dan's team includes research analysts, portfolio managers and trading specialists.   Sabre's third partner is Robin Edwards, the original founder of the business, who now fulfils a non-executive role .

Today we have USD 150m under management in the strategy and we've seen accelerated growth since the beginning of the year. Our target for year-end assets is USD 250m and I'm confident that we will achieve this.

HW: Have there been any recent changes/additions to the team?

MH: We've hired Matthew Isherwood as a quantitative research analyst for the style arbitrage team led by Dan Jelicic. Matthew was previously vice president of quant research at Financial Risk Management (FRM).

We are very pleased to have attracted a person of Matthew's calibre to join the growing investment team at Sabre, Dan Jelicic and I are committed to expanding the R&D team to ensure that we continue to stay ahead in the quest for consistent alpha generation.

HW: How and where do you distribute your funds? What is the profile of your current and targeted client base?

MH: At present, we distribute through the established hedge fund channels although we have plans for joint ventures in progress.   Our current client base leans towards the more established, sophisticated hedge fund investors who are familiar with quant investing and have a very good understanding of what we do versus other quant managers.

Now that the fund has a solid four-year track record we are hoping to make some in roads into the European pension fund market.   We believe that our niche market neutral approach should be of interest to these funds as they seek consistent alpha generation with low volatility.

HW: What is the investment process of your funds?

MH: Style Arbitrage is a highly diversified sector and market neutral quantitative equity strategy exploiting persistence (trending) seen in groups of stocks.  The strategy can be summarised as dynamic style rotation.

HW: What causes style rotation?

MH: Investors are familiar with active managers pursuing Value or Growth style strategies and know that some managers also focus on momentum and/or balance sheet factors for stock selection and return generation.

As such, at any one time the market will be focussing on a specific set of themes due to a combination of where we are in the economic cycle and short term behavioural activity prompted by reaction to news.

Sophisticated quant models can detect these themes and capitalise on them.

Sabre' approach therefore is to be style agnostic and to pursue whatever themes the market is concentrating on at any one time.  It is able to do this by screening a vast array of fundamental data and forming predictive style models.  These models have a dynamic regime change overlay that controls the timing and allocation to each theme. 

Essentially Sabre is looking at data in a different way to see information that others cannot.

HW: What is your approach to managing risk?

MH: Risk management is integral to quant money management and needs to be robust to cope with a portfolio which currently comprises some 800 names from the UK, European and US markets.

A number of metrics for leverage, liquidity and diversification are employed to ensure that the strategy adheres to its stated risk target of 6-7% p.a. volatility.

HW: Has your performance to date been as per budget and expectations? Do you expect your performance or style to change going forward?

MH: Our Sharpe Ratio since inception is 1.2 but over the last two-year period (since we incorporated upgrades from our R&D programme) this has been 1.5.  

We expect our process to continually improve.   Generally, quant strategies do not support the current perceived wisdom of early day managers generating better returns.  In fact the opposite is often true.   Good quant managers improve with time as the core process is strengthened and refined and innovative ways to diversify the portfolio are employed. The aim is to extract alpha from multi-dimensional sources and to replace decaying models ahead of time. 

HW: What events do you expect to see in your sector in the year ahead?

MH: Well, I guess competition - looking at the equity quant sector there seems to be a growing base of managers entering the universe, but time will tell how many have a robust and consistent approach to generating alpha.

HW: How will these changes impact on your portfolio?

MH: Well, we believe that we have some informational advantage - so if we are looking at things in a slightly different way to other players, then unless others start following our exact methodology we should be able to maintain our edge.   

We have an active research and development programme where each portfolio manager is also responsible for research.   This means that generally we are not exploring spurious opportunities - our portfolio managers have a good idea of what works and what doesn't and so research time is utilised very efficiently.

HW: What differentiates you from other managers in your sector?

MH: A few things.  Firstly, Dan Jelicic is a 'seasoned' quant  - he is highly focused on making money and very creative.  He has great support from a talented and experienced team.  Secondly, a four-year track record for the Fund and Dan's personal track record of managing money prior to Sabre.  Thirdly, and probably most importantly, our hybrid methodology.  We employ the best elements of a traditional quant equity approach and combine those with the best elements from statistical arbitrage strategies.   This multi-opportunity approach means we have a greater chance of making money in varying market conditions.

HW: Do you have any plans for similar product launches?

MH: The main focus is really on strengthening the current process.  However, we plan to incorporate Japanese stocks during the third quarter in a move to expand into a global trading strategy.

We also have plans to launch a higher risk/return class of the strategy and are in talks with a number of interested parties on this.

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