The Hedgeweek Interview: Melissa Hill, Principal & Chief Operating Officer, Sabre Fund Management Ltd: "We're style agnostic"
Melissa Hill highlights the strategies and plans of Sabre Fund Management Ltd., including the launch of a higher risk/return version of its style arbitrage strategy.
Melissa Hill is the Managing Principal of London-based Sabre. She was hired by the company in 1996 to head up and develop a client/asset gathering function. From 1996 onwards Melissa was responsible for raising the profile of Sabre in the investment community and, from March 2000, as a director and shareholder of the firm, had business management responsibilities. Following a corporate reorganization in June 2003, she increased her shareholding and took over the running of the firm. She then led an MBO in December 2004, which resulted in the acquisition of a controlling stake in the business.
HW: What is the background to your funds?
MH: Sabre Fund Management focuses on the design, development and management of quantitative investment strategies. The management team consists of Melissa Hill (myself), Managing Principal and Dan Jelicic, Principal and architect of the Style Arbitrage Fund. Sabre's third shareholder is Robin Edwards. Robin is the original founder of the business and having stepped back from day to day involvement some years ago, he now commits one day a week to the firm.
The Sabre Style Arbitrage methodology has been developed by Dan Jelicic over a number of years. The dynamic style rotation strategy is an extension of work Jelicic carried out whilst managing the Europe Neutral Fund for ABN AMRO in London. Dan and his colleague Patrick Dugue joined Sabre Fund Management in April 2002 and the Fund began trading in April of that year. AUM is currently USD 90m.
HW: Have there been any recent events such as launches or changes/additions to the management team?
MH: In December 2005, Colin Barrow agreed to sell me his controlling equity stake. The business has been restructured so that the management team now owns the majority of the equity in the business and there are plans to bring all the team into ownership in 2006.
HW: What is your investment process?
MH: In summary, alpha is generated by:
- Designing long/short factor portfolios that mimic styles followed by investors e.g. price to book, dividend yield, earnings revisions, long term price momentum, balance sheet factors, short term price reversals etc.
- Capturing both long term bias and persistence in these factors caused by a) longer term economic cycling and b) short term behavioural activity
- Using regime switching models to increase/reduce exposure to certain factors on a dynamic basis
We believe this strategy is sustainable in the long term as no matter what styles investors will follow our models will enable us to adapt to changing market dynamics
We also believe that this strategy occupies a niche in European market neutral - not quite stat arb and not a traditional quant factor strategy even though it has best elements of both. The portfolio turns over between one and two times a month, to give you some idea of the level of trading.
HW: How has your fund performed?
MH: Strongly. Since inception we have delivered 7% annualized alpha over cash. The annualized return is 10.3% (from August 2002 to January 2006) with low volatility (Sharpe Ratio of 1.5) and no correlation to the equity markets. 2005 performance was 13.6% and so far in 2006, we are up 3.8%.
HW: What events do you expect to see in your sector in the year ahead?
MH: Investment styles have resurfaced as an important market theme. Recent activity has been momentum centered but we believe that dividends may become a dominant theme in 2006.
Free cash flows are good and should provide continuing support for the payment of dividends due to there being few strategic options to offload surplus cash. The rise in return on equity, particularly in European markets, also points to companies being able to increase dividend payments.
HW: How will these changes/future events impact on your own portfolios?
MH: Our core process is to capture style trends. We're style agnostic. If a theme (or several themes) becomes dominant it is an opportunity for us to generate excess alpha.
HW: What differentiates you from other managers in your sector?
MH: We believe we were the first dynamic style based investment strategy in the hedge fund space and, as such, we have several years experience of very different market conditions. Following extensive R&D we have recalibrated our forecasting models and accordingly enhanced the robustness of our strategy. Additionally we have been able to back-test new models using proprietary data captured since inception and this has further enriched alpha generation. Our methodology is truly market neutral - i.e. no sector plays and no net exposure. It is uncorrelated to the equity markets and has very little correlation with other hedge fund strategies.
Our risk management systems are also robust. Dan Jelicic has extensive experience in quantitative risk management and trading takes place within tightly defined parameters whilst maximizing opportunities for generating alpha.
HW: What are your views on risk in the current environment?
MH: Truly market neutral managers are able to employ greater leverage or run more concentrated portfolios in order to boost returns whilst adhering to reasonable risk/return trade offs. It's really a question of how loud one likes one's music! We marketed our fund at a specified risk target of 6-8% p.a with the Sharpe ratio in excess of 1. When market volatility is lower than expected it is likely that a manager will undershoot the targeted risk level for a period of time as we have done if you look at the annualized track record of the fund since inception (6% p.a. volatility). However this did not affect our Sharpe ratio.
There are several market neutral funds that run at between 6 -10 times geared. Seasoned investors who are confident in their asset allocation are comfortable with this degree of leverage in order to enhance returns in their portfolios.
HW: Are investors' expectations moving upwards and how do you deal with this?
MH: Yes, we find that some investors' expectations are high. It is a competitive world and the transparency of fund information has enabled the underlying investors of fund of funds to compare performance with similar peer groups. This has lead to greater pressure on managers to perform consistently within their marketed return range. There is less tolerance of drawdowns, even though the magnitude may not be large. Timing is everything if investing short term. Longer-term investors are prepared to take the rough with the smooth. How do we deal with this increased expectancy? Well by trying to generate consistent alpha and keeping on track with a programme of R&D to make our alpha generation and trading processes as good as we can. In August of last year we brought US trading on line. This has added uncorrelated alpha to our process. Our next project is to bring on Japanese stocks. We hope that by continually diversifying our alpha sources and perfecting our allocation models that we will build a strategy, which can generate our targeted returns in most market environments.
HW: Are you planning any further launches this year?
MH: Yes. We are planning to run a higher risk/return version of our strategy, either in fund or managed account format or via a structured product designed by our prime broker. This will most likely target annualized volatility of 10-12% with expected returns in the high teens plus. Given that we expect our Sharpe ratio to remain on target, in conjunction with the existing fund, we can offer investors the flexibility of choosing the level of volatility and return they desire.
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