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The Hedgeweek Interview: Jay R Feuerstein, President, Xenon Capital Management, LLC: "Experience is at the root of all our models"

Jay R Feuerstein describes Xenon Capital's 100 per cent systematic, short-term, multi-strategy, low-volatility approach.

Prior to joining Xenon Capital Management, Jay R. Feuerstein was a Managing Director/Principal in the Chicago office of Bear Stearns & Co Inc, working with clients in the hedge fund, mutual fund, insurance, and pension areas. Before this, Jay served as Senior Vice President for Paine Webber following its purchase of Kidder Peabody in 1995. At Kidder, he worked as Director of Global Futures Sales and Marketing for Fixed Income. Jay holds an MBA in Finance from the University of Chicago. Jay has been widely published in Corporate Finance Review, Treasury & Risk Management, The Journal of Futures Markets, and MFA Reporter. Jay has lectured at many professional conferences and educational seminars at institutions like the Northwestern University's Kellogg School of Management, Duke University's Fuqua Graduate School of Business, Chicago Mercantile Exchange, Chicago Board of Options Exchange, Marsh & McLennan, and Chicago Board of Trade.

HW: What is the background to the fund?

JRF: Xenon Capital Management LLC is the Commodity Trading Advisor (CTA) who manages the Xenon Diversified program. Like most CTAs the bulk of Xenon's assets under management are in managed accounts. In Xenon's case, of the USD 70 million under management, USD 56 million are in managed accounts while the Xenon Partners fund has only USD 4 million under management.  Xenon started the Diversified program in August 2004.

Xenon's managing partner, Jay Feuerstein, has more than 25 years of experience in the futures industry with several international investment banks, most recently as a Managing Director with Bear Stearns. He has an MBA in finance from the University of Chicago and has published extensively in both academic and industry journals. He and Steve Schnur, Xenon Chief Investment Officer, founded Xenon in 2001 after working together for several years at Bear Stearns. Will Spurgin, Xenon's Research Director, joined the firm in early 2002. Mssrs Feuerstein, Schnur and Spurgin are all principals in Xenon, and all have been trained in quantitative disciplines at the University of Chicago.

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

JRF: The Xenon Partners fund is a domestic fund, though it can accommodate foreign investors so long as they are comfortable with the tax consequences. The managed accounts include clients from all over the world. Xenon's target client base is fund-of-funds and family offices.
HW: What is the investment process of your fund?

JRF: Xenon is a 100 per cent systematic, short-term, multi-strategy, low-volatility CTA. As such, it uses multiple models to systematically make its trading decisions. Experience is at the root of all of Xenon's models, which trade in the interest rate, currencies, metals and energies futures markets. Over the years, Xenon's principals have observed market behavior, which they have quantified and back-tested to build five models, which have little correlation with each other.
HW: How do you generate ideas for your fund?

JRF: Although the models trade systematically, we are always looking for new ones to take advantage of market opportunities.
HW: What is your approach to managing risk?

JRF: We manage risk daily by targeting daily annualized volatility. We use an exponential moving average of the true range to measure instrument volatility. Every day, we resize our positions to meet our volatility target so that we make the same 'bet' every day.
HW: How/against what do you benchmark the performance of your fund?

JRF: We measure our performance against the Calyon/Barclay CTA index and the S and P managed futures index.
HW: Has your performance been as per budget and expectations? Do you expect your performance or style to change going forward?

JRF: Our performance has met our targets of low volatility and approximately 10 per cent returns. Going forward, we expect to continue along those lines.
HW: What opportunities are you looking at right now?

JRF: We are looking at the expansion of our markets to include trading in more commodities.
HW: What events do you expect to see in your sector in the year ahead?

JRF: I expect to see an increase in volatility, which should be good for the sector. Further, I expect the change in the Fed from Greenspan to Bernanke will provide some opportunities.
HW: How will these changes/future events impact on your own portfolio?

JRF: I expect that these changes will boost my portfolio's returns given more opportunities in the markets affected by the change at the Fed: interest rates and currencies.
HW: What differentiates you from other managers in your sector?

JRF:Xenon has a consistent investment process and philosophy. Although we are systematic and quantitative, all of our models are grounded in experience. We have a heavy emphasis on fixed income. We also tend to be short-term oriented in a sector dominated by long-term trend-followers. In addition, we trade multiple models which compliment each other across several time frames with little correlation to each other. Finally, we have a sophisticated risk management system that operates on a per-instrument and portfolio basis.
HW: Do you have any plans for similar/other product launches in the near future?

JRF: No, we have capacity in this strategy for over USD 1 billion. Given that we are currently only USD 70 million, we are focused on our current program. 

(Jay R Feuerstein was interviewed on 16 February 2006; the interview was updated on 18 May 2006)

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