The Hedgeweek Interview: Alan Goulding & Dr Paul Netherwood of Beach Horizon LLP: Diversity is the Key
Beach Horizon co-founders Alan Goulding and Dr Paul Netherwood outline the investment ideas and strategies that define Beach Horizon.
Alan Goulding and Dr Paul Netherwood founded Beach Horizon LLP with David Beach and Sanjeev Lakhanpal. All of them started their careers at AHL (now Man Investments) in 1993. Alan moved on to Credit Suisse First Boston and later a risk management software house prior to joining Beach in 2002. He has a first class honours degree in Computer Science from University of Wales College Cardiff. Paul moved to Nomura after AHL and later a software house specializing in risk management before joining Beach in 2001. He has a degree in Computer Science and a PhD in Pattern Recognition from Kingston University.
HW: What is the background to the fund?
AG & PN: Beach Horizon LLP was launched in May 2005 as a majority-owned subsidiary of Beach Capital Management Ltd. The other partners are Sanjeev Lakhanpal, Paul Netherwood and Alan Goulding who met in the early 90s when they all worked for AHL.
The idea for the fund originated from Sanjeev when he joined the trading desk at Beach Capital Management. He saw the opportunity to develop a new fund within the Beach structure with a complementary style to that of Beach Capital's flagship Discretionary Programme. The fund was launched in May 2005 and currently has AuM of USD 45 million.
HW: How and where do you distribute the fund? What is your current and targeted client base?
AG & PN: Our target client base is mainly institutional investors. Our in-house sales team markets directly.
HW: What is the investment process of your fund?
AG & PN: The Beach Horizon fund uses a fully automated multiple time-frame trend-following system that identifies trading opportunities and takes risk-adjusted positions in nearly 90 markets at multiple points during the trading day. The portfolio is constructed in a top-down way using an equally-weighted sector approach whereby risk is apportioned equally between ten sectors of futures and foreign exchange markets. This process is a result of the Horizon team's belief that true diversification and avoidance of optimization are the keys to stable performance.
One of the results of this allocation methodology is that the fund has a higher than usual allocation to commodities which make up 60% of the portfolio. High correlations are commonplace amongst financial markets and can strengthen during volatile conditions whereas the commodities markets are relatively immune to these effects.
HW: How do you generate ideas for your fund?
AG & PN: The trading approach for the fund uses a model which is fixed. It automatically looks for trading opportunities in the markets and does not require ongoing idea generation or discretionary intervention. However, the partners are actively involved in ongoing research to look at ways of refining and evolving the model.
HW: What is your approach to managing risk?
AG & PN: Risk is apportioned downward from the portfolio level equally between sector and then within each sector, equally between markets. This maximizes diversity in the portfolio which we believe is the key to reducing risk. The automated systems which run for each market normalize their risk in such a way that for each market in a given sector, a equal amount of risk is taken.
HW: How/against what do you benchmark the performance of your fund?
AG & PN: The fund is an absolute return fund in that performance is measured is on an absolute risk adjusted basis rather than relative to a benchmark. In addition, in the managed futures arena, it's difficult to find an appropriate benchmark. However we do report our performance along side various managed futures indices including the Barclays BTOP50 index for comparison.
HW: Has your performance been as per budget and expectations? Do you expect your performance or style to change going forward?
AG & PN: Our return from launch in May to the end of the year was 19.6% (December's figure is an estimate at the time of writing) which is in line with our expectations. The actual volatility exhibited was a little lower than our targeted 15%. We don't try to predict performance going forward but we feel that our strategy of very high diversification and balanced portfolio is the best way to achieve stability of returns.
We have no immediate plans to alter the model but it is likely that in the long term the model will evolve based on findings from research activities.
HW: What opportunities are you looking at right now?
AG & PN: One of the possibilities we are currently investigating is expanding and/or further diversifying the range of futures contracts traded. We are also looking at better ways of identifying range-bound markets.
HW: What events do you expect to see in your sector in the year ahead?
AG & PN: As technical traders, we aren't really in the business of forecasting future market conditions but we would expect to see continued volatility in the industrial commodities.
HW: How will these changes/future events impact on your own portfolio?
AG & PN: As trend-followers, we like markets to be moving rather than static. As we treat our market sectors equally, we are fairly indifferent to where moves come from.
HW: What differentiates you from other managers in your sector?
AG & PN: We believe that our approach to genuine portfolio diversification and avoidance of optimization are our biggest differentiators. Our approach to diversification leads to a much higher weighting in commodities than most other managers in this sector.
HW: Do you have any plans for similar/other product launches in the near future?
AG & PN: Initially our focus will be on the Horizon Fund. We will continue to do research into new systems so it is possible that we will offer complementary programmes in the longer term.
(Alan Goulding and Paul Netherwood were interviewed on 17 February 2006)
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