Fri, 16/06/2006 - 07:00
Brian McCarthy discusses the systematic processes that drive Alder Capital's absolute return-focused currency investment strategies.
Brian McCarthy co-founded Alder Capital in May 2000 and is an executive director of the company. Prior to setting up Alder Capital, Brian worked for Gaiacorp Ireland LTD. In 1991, Brian graduated from University College Dublin with a Masters Degree in Economic Science.
HW: What is the background to Alder Capital?
BM: Alder Capital is regulated by the Financial Regulator under the Investment Intermediaries Act, 1995, is registered with the Commodity Futures Trading Commission and is a member of the National Futures Association.
Alder Capital offers two investment programs; Alder Global 10 and Alder Global 20. The Alder Global 10 operates at half the risk level of the Alder Global 20 program. Alder Global 20 launched on 1st February 2001. The program now has a five-year track record. Four out of the five periods show double-digit returns; the remaining year shows a single-digit loss.
Alder Global 10 launched on 16th October 2000. The program also has a five-year track record. The senior management team of Alder Capital is Mark Caslin, Brian McCarthy and John Caslin. The firm's assets under management are currently over USD100m. A description of the firm's investment strategy and a statement of the basis of performance reporting are set out in the firm's disclosure document which is available at www.aldercapital.com
HW: How and where do you distribute the fund? What is your current and targeted client base?
BM: Alder Capital distributes its programs to institutional investors in Ireland, UK, France and United States. Typical investors include pension funds, life assurance companies, banks, and hedge fund of funds.
HW: What is the investment process of your fund?
BM: Both programs follow the same investment strategy but the Alder Global 10 program operates at half the risk of the Alder Global 20 program. The investment strategy is to invest in currency markets in pursuit of absolute return. The program seeks to identify directional movements in the three biggest and most liquid currency markets in the world, Euro, US Dollar and Japanese Yen.
There are two aspects to the program:
1. It seeks to identify directional movements in the EUR/Yen, EUR/USD and USD/Yen currency pairs. It does not invest in all directional movements, only in those that have the correct volatility profile.
2. Yield: The program also attempts to capture yield differentials between currency pairs.
HW: How do you generate ideas for your fund?
BM: Alder Capital adopts a fully systematic process for investing; there is no discretionary trading. All trading decisions are generated by the system based on inputs which include yield differentials, volatilities and spot returns on the three currency pairs EUR/Yen, EUR/USD and USD/Yen.
HW: What is your approach to managing risk?
BM: Alder Capital manages risk on a daily basis using its own proprietary risk forecasting system called CALM. Positions are re-evaluated several times throughout the trading day and adjusted for changes in the direction, yield differential and risk of the three currency pairs - EUR/Yen, EUR/USD and USD/Yen.
HW: How/against what do you benchmark the performance of your fund?
BM: Currently, the most appropriate benchmark for Alder Capital's programs is the Parker Global FX Systematic Risk Adjusted Index. This index is comprised exclusively of pure FX strategies. All the strategies in the index are systematic return strategies and the index returns are volatility adjusted which means you can compare 'apples to apples'. Over the 12 months to the end of March 2006, the Alder Global 20 program has outperformed the index on a risk-adjusted basis by over 8%.
HW: Has your performance been as per budget and expectations? Do you expect your performance or style to change going forward?
BM: You cannot target returns, you can only target risk. Alder Capital uses its risk forecasting system, CALM, to size its positions in the market. We then try to make as much return as our opportunity set permits for that level of risk.
HW: What events do you expect to see in your sector in the year ahead?
BM: We expect a growing interest from pension funds that are looking at the FX asset class to diversify their portfolios. Most pension funds have portfolios that are heavily weighted towards equities. FX and equities tend not to have their good and bad times at the same time as each other. Some pension funds have realised that by adding FX strategies to their equity exposure they can reduce the risk of their portfolios without hampering the long-term returns of their portfolios.
HW: How will these changes/future events impact on your own portfolio?
BM: We expect this realisation on the part of pension schemes to lead to growth in AUM.
HW: What differentiates you from other managers in your sector?
BM: Some managers in our sector participate in strong directional movements but tend to stay invested too long; they only begin to exit positions when the directional reversal has already started. Alder Capital is different. Part of our systematic process looks at indicators that attempt to forecast when these directional movements are likely to end or when the yield differential is not worth trying to capture. Because of this, we have a more advanced taking profit mechanism. This is one reason why the Alder Global 20 program has outperformed other systematic managers, as measured by the Parker Global FX Systematic Risk Adjusted Index, by over 8% in the 12 months to end of March 2006.
HW: Do you have any plans for similar/other product launches in the near future?
BM: Alder Capital is always conducting research aimed at improving its systematic trading programs. In terms of similar products, because of our success at forecasting currency volatility, we are carrying out a feasibility study on a currency options trading program.
Brian McCarthy was interviewed on 24th May 2006
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