The Hedgeweek Interview: Adrian Owens and Andrew Snowball, Augustus Asset Managers: "The current environment is excellent for macro strategies"
Adrian Owens and Andrew Snowball, managers of the JB Global Rates Hedge Fund at Augustus Asset Managers, say that as volatility subsides, they expect fundamental drivers to play an increased role as investors refocus on value and fundamentals.
HW: What is the background to your company and fund?
AO/AS: Augustus Asset Managers is an independent asset manager with a focus on fixed income and currency asset management and is skilled in both relative and absolute return management. Augustus had total assets under management of around USD10.6bn at the end of 2007 in long-only, hedge fund and absolute return products across the risk spectrum.
Augustus has been managing fixed income portfolios for 23 years, pre-dating the establishment of the Citigroup World Government Bond Index. Over this period the company has developed the necessary resources to research and monitor developments within these markets, which has enabled it to achieve its stated aim of consistently outperforming its benchmarks - generating alpha - with relatively low volatility.
Augustus Asset Managers was previously known as Julius Baer Investments, which was the subject of a management buyout on January 11, 2007. Up to 90 per cent of the company is held effectively by the staff of the company. The company remains sub-advisor on certain Julius Baer-branded and distributed funds.
The JB Global Rates Hedge Fund was launched in January 2004, and assets in the strategy through offshore and onshore funds and managed accounts totalled USD373m at the end of December.
HW: Who are your key service providers?
AO/AS: For the JB Global Rates Hedge Fund the key service providers are PricewaterhouseCoopers as auditor, Simmons and Simmons and Maples and Calder as legal counsel and Kirkpatrick & Lockhart Preston Gates Ellis as legal counsel for the Cayman fund only. The fund administrator is International Fund Services (Ireland).
HW: What is your investment process?
AO/AS: Major global macroeconomic themes are discussed by the entire portfolio management team at bi-weekly fixed income and foreign exchange meetings with specific ideas researched by individual managers using fundamental analysis.
Typically the portfolio managers look to identify a market paradigm and then analyse global macro fundamentals to help identify opportunities. Factors such as market risk appetite and liquidity are taken into account to arrive at a strategic or tactical allocation within the fund as appropriate.
Additionally, positioning and technicals will be taken into account. Outside research comes largely from between 10 and 12 international brokerage houses, but the focus is on the economics. This information is used to supplement in-house research from which trade ideas are developed.
The portfolio managers will be responsible for sizing the risk and applying the positions whether scaled in or full. Typically for a short-term, more opportunistic trade, the full position will be applied at trade entry as opposed to a more strategic trade where the position is more likely to be scaled in.
Stop-losses and stop-profits are set at trade-entry for all positions. Value at risk is also monitored, and if it becomes unfavourable then trades are closed out. Once the trade has been executed the relevant portfolio manager then monitors the position throughout its life. Ideas can be entered into the Riskmetrics system and also Thinkfolio, our trade processing system, to see their effect on the portfolio before they are actually executed.
HW: How has your fund performed?
AO/AS: The JB Global Rates Hedge Fund has a target of Libor plus 15 per cent per annum. Since its launch it has had an annualised return, net of fees, of 9.16 per cent with a Sharpe ratio of 0.7. The fund had a modest 7 per cent return in its first year, 2004, followed by a strong 16.6 per cent in 2005. In 2006 the fund had a disappointing year with a small negative amid a period of limited directionality, trends and volatility. In 2007 the fund produced attractive returns of 14.5 per cent with returns coming from both fixed income and currency themes.
HW: How many positions are in your portfolio?
AO/AS: This global macro-style strategy focuses on fixed income and currency markets and looks to build a diversified, primarily directional portfolio focused on developed markets with opportunistic allocations to emerging markets. The number of instruments is between 50 and 100. There are no minimum or maximum trades.
The fund does not have a consistent long or short bias and maximum exposure is eight times equity long and eight times short. As of the last weekly risk meeting on February 5 there were 75 positions in the JB Global Rates Hedge Fund.
HW: What is the appeal of your strategy to investors?
AO/AS: We offer a solid return profile. While the marketplace for our fixed income and currency macro fund has not always been favourable with directionality, volatility and trending markets, we feel that our returns since inception are consistent.
The fund has low correlation with equities, bonds and macro hedge funds. Over a rolling two-year period the correlation of the JB Global Rates Hedge Fund has declined to the extent that at the end of last year the correlation levels for the S&P 500, the JPMorgan US Government Bond Index and the HFR Marco Index ranged from 0.2 to -0.2.
The JB Global Rates Hedge Fund also thrives on simplicity. Where possible portfolio managers look to use plain vanilla instruments such as FX forwards and options with limited use of exotic instruments.
The fund structure offers monthly dealing with a 30-day notice period, there are no lock-up periods and redemption fees attached to the fund, and investors may access portfolio holdings with a delay of five business days provided that they sign a confidentiality agreement.
Finally, the current environment is excellent for macro strategies, with volatility, directionality and lack of central bank transparency creating more opportunities for the asset class.
HW: What events do you expect to see in your sector in the year ahead?
AO/AS: Following credit and equity upheaval we have seen interest rates and currency markets trade with one eye to positioning and another to risk aversion. As volatility subsides we expect fundamental drivers to play an increased role as investors again focus on value and fundamentals. The fund is positioned to take advantage of such developments.
HW: What differentiates you from other managers in your sector?
AO/AS: The JB Global Rates Hedge Fund is a fixed income and currency macro fund that unlike other global macro funds does not invest in real estate, commodities and equities. Over a rolling two-year period it has a negative correlation with the HFR Macro Index and low correlation with the S&P 500 and the Julius Baer Multibond-Global Bond dollar hedged.
HW: What is your attitude toward risk in general?
AO/AS: We have used the current environment of uncertainty and the fact that some currencies have been driven by fear and positioning to add to risk. Around half of our increased risk has come from active additions to positions and half from the sharp pick-up in market volatility.
HW: Are investors' expectations moving upward?
AO/AS: Investors' expectations are that volatility and directionality are back and increasing, and so there should be exciting opportunities ahead. We are seeing an increase in due diligence activity and investor interest in the asset class.
HW: How do you distribute your products?
AO/AS: Augustus Asset Managers does most of the marketing of its single-manager hedge fund products and works discretely with three third-party marketers for certain customers and geographic markets.
HW: Are you planning any further launches this year?
AO/AS: Not at present. Our last single manager hedge fund launch was on July 1 last year when we launched the JB Currency Hedge Fund, which invests in discretionary foreign exchange.
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