The Hedgeweek Interview: David Walsh, Managing Director, Appleton Capital Management: "Research is our Edge"

David Walsh discusses the ideas and strategies that drive performance at Appleton Capital Management.

David Walsh, Managing Director and Chief Investment Officer and has been involved in the alternative investment industry since 1989. David has managed money both from a systematic and discretionary standpoint, as well as having experience in a bank treasury environment. Having initially been hired by Gandon Financial Fund Management in Dublin, he worked as a Proprietary Trader in Foreign Exchange, utilising an array of technical and fundamental tools in recording consecutive profitable years throughout his time at the firm.

He was subsequently hired by ABN AMRO in 1992 as a Senior Dealer where his mandate was to initiate a proprietary trading effort to complement their existing market making business. In January 1995, the desire to return once more to fund management led to his joining Appleton as Head of Trading. Since inception, he has held ultimate responsibility for all investment management funds and programs and oversees all ongoing research and trading activities. He has extensive experience across markets including foreign exchange, futures, equities and commodities. In 1999, he led the management buyout of the firm in conjunction with the other principals and is the single largest shareholder. David holds a BSc in Applied Mathematics from the University of Limerick in Ireland.

HW: What is the background to Appleton?

DW: Appleton Capital Management is an independent, privately owned investment advisory company with offices located in Dublin, New York and Greece. The company was founded initially in 1992 by a Danish corporation to capitalize on investment opportunities in the currency markets.

The current management team were hired to initiate this process and to develop a business around this concept. In January 1995 the investment platform for the Appleton 25% Risk Program went live with the foreign exchange markets remaining the initial focus.  In 1999, led by David Walsh, the management team began negotiations with the shareholders to conduct a management buyout. The company also overhauled its research department, to expand its investment horizons into other asset classes, such as equities, futures and fixed-income.  Both efforts were successful. 100% of the ownership of the company passed into the hands of the principals and Appleton's enhanced research facility meant it was able to diversify and serve its clients across multiple investment styles and asset classes. A permanent commitment to research has allowed Appleton to maintain a position at the forefront amongst the world's premier investment managers.  Testament to Appleton's success is a track record of continued performance and innovation within the global foreign exchange markets. It currently holds USD$173 Million in assets under management

Principals: Besides myself, there are:

Jeremy O' Friel - Jeremy is Sales and Marketing Director and is responsible for global business development and client relations strategy and operation. Having joined the firm in 1996, Jeremy worked initially on the execution desk before moving full-time into a sales role. He has won mandates from the wide range of client classifications that make up Appleton's customer base, including pension funds, private banks, investment banks, intermediaries and high-net-worth investors. He is also heavily involved in the alternative investment industry and has sat on the Managed Funds Association's Communications and Foreign Relations Committees. In the course of this, he was a regular contributor to the MFA Reporter magazine with articles related to alternative investments in general. He has also been a contributor to the Financial Times USA and various other trade magazines and journals. Jeremy graduated from University College, Dublin, with a B.Comm (Hons) and a Masters in Business from the Graduate School of Business. He also holds the Chartered Financial Analyst designation, having completed the syllabus between 1999 and 2001. With David Walsh, Jeremy completed the management buyout of the firm and sits on the Board of Directors with his partners.

Simon Stroughair- Simon is Research Manager and has been with Appleton since 1999. He is responsible for the ongoing research and development of the currency markets and trading programs. Throughout his time with Appleton, Simon has also been instrumental in the ongoing research into advanced volatility and trend based forecasting systems. He joined the firm from Lehman Brothers in London, where he had worked as a Structurer and Product Manager on the FX Options and Interest Rate Derivatives desks. Prior to embarking on his career in the financial markets, Simon enjoyed a remarkable academic career at Trinity College Dublin, where he earned a First Class Honours Degree (B.A. Mod) in Theoretical Physics. Simon was made a partner in Appleton in 2004 and sits on the Board.

Fergus Walsh - Fergus is responsible for all of Appleton's business development efforts in Europe and the Middle East. Having joined the firm in 2001, he was made a partner in 2004 in recognition of his work over the preceding three years. Specifically, Fergus has won mandates from the largely institutional client base that make up the bulk of Appleton's business in the region. He has also spent time working on Appleton's trading desk. Fergus joined the firm from Tellabs, where he served as Human Resource Manager from 1999 to 2001. Prior to that, he was involved in the HR department of Shannon Aerospace. Having spent two years as a Contract Lecturer at the University of Limerick from 1997 to 1999, he continues to give guest lectures at the University. Having earned his Bachelor of Business Studies in 1995, he went on to earn a Masters in Business also from the same school.

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

DW: Appleton are glad to count some of the worlds largest financial institutions amongst our relationships and seek to establish long term alliances that benefit all parties.  Jeremy O' Friel is responsible for identifying and working with our U.S. institutional and private clients.  Both Fergus Walsh and Serafim Charalabidis are responsible for client relationships in Europe and the Middle East

HW: What is the investment process of your fund?

DW: The Appleton 25% risk Program is traded using an entirely systematic approach to a select basket of currencies.  This basket is selected according to their tendency to display memory, or trend.  This criterion, coupled with filters related to liquidity and political stability, presents us with an optimal amount of currencies in the opportunity set.  These will tend to be major currencies such as those in the G7/G8 grouping.  These currencies form the Program's portfolio.  Any portfolio is composed based on three key components - the expected return, expected risk and the correlation between subholdings of the portfolio. Risk is kept constant at all times, made possible by effective volatility forecasting techniques.  The Program targets annualised volatility of 25%. This framework forms the basis of modern portfolio theory and is also at the core of the Appleton 25% Risk Program.

HW: How do you generate ideas for your fund?

DW: The firm's efforts to improve its trading methodology or generate ideas for the Program is through its on-going research, including human resource and hardware construction. This research is underpinned by three key factors: the implementation of our core beliefs, the quality of our research technology and the commitment and talent of our research staff.  Our underlying belief is that research ideas should be influenced by real - time trading experience rather than being overly theoretical. We also believe these ideas should be implemented in a manner that is rigorously systematic. Equally important is our research technology. The development in the quality and range of proprietary software have allowed for an exponentially greater level of innovation in investment strategies than would be possible through the use of standard analytical tools and techniques. Our research team, made up of a carefully selected group of the most gifted mathematical talent available, act as a tightly co-ordinated team. The research and trading teams work together, sharing skills and knowledge to make Appleton's investment strategy a reality.

HW: What is your approach to managing risk?

DW: The risk management policy is based on the belief that risk should be kept constant at all times.  Thus, accounts that are traded under the Appleton 25% Risk Program should always have 25% volatility in their portfolio at any one time.  In order to achieve this, it is essential to have effective volatility forecasting techniques in place.  Therefore, each possible trade is given a forecasted volatility value.  Given that the target volatility is always 25%, from this equation we can derive a gearing factor for each trade.  Our approach is therefore a Value at Risk approach, whereby the VaR is always 25%.

HW: How/against what do you benchmark the performance of your fund?

DW: The Program has no correlation objectives in relation to the major benchmarks.  One of the advantages of an investment in the global currency markets derives from the fact that currency returns tend to display an extremely low level of correlation to the investment returns of the traditional stock, bond and real estate currencies.  This allows the investor a further layer of diversification and can help to reduce the overall risk of the existing portfolio.
The two advisors that most closely compare to ourselves are QFS and FX Concepts, which are similar in terms of strategy, assets under management and long term track records.

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

DW: We target an average return in the region of 15%, net of all fees. Therefore, our track record over the last 11 years has been right on target.

HW: What opportunities are you looking at right now?

DW: We do not ever focus on specific themes at the expense of others. The systematic process is agnostic as to where the next opportunity might lie.

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

DW: Again, we do not make long-term forecasts in relation to either expected market levels or events.

HW: How will these changes/future events impact on your own portfolio?

DW: As above. We do not make long-term forecasts.

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

DW: Undoubtedly, research is our edge.  It is unlikely that another CTA can be found who devotes as much time and financial resources to the research effort.  The strengths of the trading methodology are the risk management and the market selection process.  Both are unique. We have been investing client capital in the major global currency markets since 1995.  Our skill-based approach to the foreign exchange markets provides several benefits to the client and the portfolio.  Primarily, we have provided an independent and sustainable source of return as evidenced through the longevity and quality of the live performance record.  Furthermore, this return displays a low correlation to traditional asset classes and consequently brings the benefit of portfolio diversification to the investor.

HW: Do you have any plans for similar/other product launches in the near future?

DW: Following on from the success of our two previous Capital Protected Funds, we are pleased to announce the launch of the Appleton Protected Currency Fund - Series 3. The offer period will run from the 1st of February to the 15th of April 2006.  The Fund will allow capital protection through the purchase of zero-coupon securities purchased from a AA-rated bank.  Whilst a certain percentage of the Fund's assets are required to accrue to the initial investment amount, the balance can be used to make a leveraged investment in the currency markets. This leverage does affect the level of capital protection and allows the Fund to produce a higher rate of return due to the higher participation rate.

We also hope to launch a Fourth Series of this fund in the fourth quarter of this year.

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