Fri, 02/11/2007 - 06:00
Managing director Dan Ascani explains Gemini Futures' three-pronged investment approach that incorporates a conservative fixed-income allocation, gold forward or futures and options contracts to generate Gold Forward Offered Rate income, and long positions using gold futures when the precious metal is - as now - in an uptrend.
HW: What is the background of Gemini Futures?
DA: Gemini Futures is based in Palm Beach Gardens, Florida. The Gemini Long/Short Gold Fund and Gemini Total Return Gold Fund were both launched on August 1 this year, with myself as portfolio manager, and the funds currently have a combined USD2m in assets under management.
HW: Who are your service providers?
DA: We use Arthur F. Bell, Jr. & Associates as our accounting firm, Dechert as our legal counsel, Michael J. Liccar & Co as fund administrator and MF Global Securities as prime broker.
HW: How and where do you distribute the fund? What is the profile of your current and targeted client base?
DA: Our distribution is through broker/dealers and futures introducing brokers. The targeted client base consists of high net worth investors, family offices, funds of funds, plan sponsors and commodity trading advisers.
HW: What is the investment process of your fund?
DA: We seek to generate investment returns on both the income and principal appreciation sides - with the same dollar - in order to capture up to double the Treasury bill interest rate, plus capital gains.
The Gemini Long/Short Gold Fund follows a three-pronged strategy. First, we hold a conservative fixed-income allocation that is primarily in investment-grade Treasury bills, notes, and bonds of short to intermediate duration. When the yield curve is not normally shaped, as we have experienced for much of this year, our holdings are primarily in overnight repurchase agreements for Treasuries. In fact, since launch on August 1, we have been exclusively in overnight repo agreements in Treasuries with this part of our strategy.
We also have the option to move into other investment grade instruments such as US government obligations, investment grade corporate securities and commercial paper, and mortgage-backed securities - when the credit market repricing cycle is complete, that is.
For the second prong in our strategy, we invest in gold forward or futures and options contracts to receive Gold Forward Offered Rate income. The GOFO strategy allows us to arbitrage the difference between the dollar Libor rate and the gold lease rate. This, combined with the fixed-income allocation, is essentially the opportunity to get up to double interest, money market interest plus GOFO interest.
Third, we take long positions using gold futures according to our proprietary quant model when gold is in an uptrend. The strategy we follow with the Gemini Total Return Gold Fund, our second hedge fund, is similar to that of the Long/Short Fund, except that we do not take on leverage in our long positions in gold futures when gold is in an uptrend. Instead, we take on long positions only to hedge any short gold exposure in our gold forward positions.
HW: How do you generate ideas for your fund?
DA: The funds are always invested in fixed-income investments and gold forward contracts yielding GOFO income. Both funds purchase gold futures contracts during sustained gold rallies. Entry and exit signals for futures contracts are given by our proprietary quant model.
HW: What is your approach to managing risk?
DA: For long gold futures contracts, which serve to hedge short gold exposure from the gold forward positions (and, for the Long/Short strategy, to leverage the fund to take advantage of gold rallies), we use a converging volatility stop-loss. While we will always hold short gold forward or futures positions to earn GOFO, long futures positions will only be taken when gold is in a price uptrend to take advantage of price rallies.
Here's an example of how the converging volatility stop-loss works. Initially, the stop-loss trigger price is based on gold's recent average daily range, and moving averages optimised by our quant model. Should the market move higher, the stop trails the price upward according to our model's volatility analysis. Eventually, the stop converges to the current price until triggered, and we close out the long futures positions.
According to our analysis of historic trends, this method of futures risk management is consistent with the way the gold futures market typically trends. Our analysis also indicates that the converging volatility stop-loss technique is the best way to define objectively when an uptrend in gold prices is ending.
We expect to hold long futures positions approximately 30 per cent of the time as a hedge against gold price advances that can be caused by event-driven and socioeconomic conditions.
We believe that employing these diversification and risk management tactics will enable us to generate the risk-managed returns that we seek to deliver for our clients by capturing 'double interest' available to investors in the fund while hedging short gold exposure during price uptrends.
For the Long/Short strategy, our long positions not only hedge the short physical positions we hold to extract GOFO, but enable us to take advantage of the uptrend by opening enough long positions to attain a 1.5 times leverage. This part of our strategy leverages the fund's assets to accomplish both a hedge and a leveraged position. For the Total Return strategy, long positions are opened only enough to hedge short gold exposure.
HW: Has your performance been as per budget and expectations?
DA: Both funds were at the beginning of August, and performance has been up to expectations during the gold price advance to a new 30-year high that has been underway during most of the first two months since launch. We do not expect to change our investment style going forward.
HW: What opportunities are you looking at right now?
DA: We have allocations to all three prongs of our strategy - fixed income, GOFO income and futures. Gold is continuing in its strong uptrend, so we are currently holding long futures positions to take advantage of that uptrend, while we continue to employ the other two prongs of the strategy for fixed income generation.
When gold's uptrend slows, we plan to take off our long positions but continue to remain invested in the first two prongs of our strategy for generating cash flow streams from fixed income and gold forward investments.
HW: What events do you expect to see in your sector in the year ahead? How will they impact on your own portfolio?
DA: Because of the unique features of our strategy, we have the ability for fixed-income generation as well as the potential for capital gains in up, down, and sideways markets. We believe that gold is highly likely to continue its uptrend in the coming months.
HW: What differentiates you from other managers in your sector?
DA: Our strategy, with its fixed-income and capital gains return components, does not fit into any of the standard investment strategy categories. However, the characteristics of our strategy meet what we believe are five key traits that investors are looking for: return generation that is not dependent upon market direction or economic cycles; low correlation to virtually any other investment; a hedge against global economic risk and equity market risk, including the continued fallout from the sub-prime CDO situation; a style of investing unlike anything else already in their portfolio, and an alternative strategy that is truly worthy of the name.
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