The Hedgeweek Interview: Adrian Owens, Augustus Asset Managers Limited: "An ideal backdrop for good discretionary currency managers"
Adrian Owens, manager of the JB Currency Hedge Fund - Discretionary Segregated Portfolio at Augustus, says the strategy has achieved a consistently attractive profile of returns since January 2004, and expects continued success this year amid high volatility and higher than usual uncertainty.
HW: What is the background to your company and fund?
AO: Augustus Asset Managers (Augustus) 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 USD11.54bn at the end of January 2008 in long-only, hedge fund and absolute return products across the risk spectrum.
Augustus has been managing fixed income portfolios for 25 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 was previously known as Julius Baer Investments Limited, 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 Currency Hedge Fund - Discretionary Segregated Portfolio was launched last July. Assets in the strategy through offshore and onshore funds and managed accounts totalled USD41m as of January 31, 2008.
HW: Who are your key service providers?
AO: For the JB Currency Hedge Fund - Discretionary Segregated Portfolio the key service providers are PricewaterhouseCoopers as auditor, Simmons & 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: We believe that currency markets are ultimately driven by economic fundamentals such as relative growth, interest rates, inflation and capital flows. However, we acknowledge that for prolonged periods other factors such as sentiment and positioning can dominate. As such, an investment idea typically originates from a situation where our view of a country's fundamentals differs from that being priced by the market.
Although we attach a lot of weight to the fundamental drivers, often a more important consideration is to identify the market paradigm at any given time. For example, interest rate levels are currently key drivers of currency, and this has to be factored into any investment decision.
The next step in our process is to try to identify the extent to which our view is already priced, for which we use a variety of valuation metrics. Finally, current sentiment and positioning is assessed in an effort to minimise the threat from consensus and over-owned trades. Implementation and structuring of a trade will be a function of a host of factors ranging from conviction level to tail risk and drivers of the trade.
HW: How has your fund performed?
AO: The JB Currency Hedge Fund - Discretionary Segregated Portfolio has a target of Libor plus 10 per cent per annum. The fund returned 7.07 per cent for its first six months to December 31 last year, and around 5.7 per cent up to the end of February 2008.
HW: How many positions are in your portfolio?
AO: There is a minimum of six themes, and there is no maximum to the number of positions we can run within the risk management of gearing and value at risk. The average number of discretionary positions is 30. In terms of geographical focus, more than 75 per cent of the fund is invested in G10 markets. As of March 4, there were 35 positions in the JB Currency Hedge Fund - Discretionary Segregated Portfolio.
HW: What is the appeal of your strategy to investors?
AO: We offer a solid return profile. Looking at the pro forma discretionary foreign exchange returns carve-out from the JB Global Rates Hedge Fund and the returns since launch of the fund in its own right, we have achieved a consistently attractive profile of returns in this asset class since January 2004. Up to January 31, 2008 the annualised return of Discretionary FX has been 14.33 per cent with a Sharpe ratio of 1.31.
Other factors are the fund's typically low correlation to equity and bond markets, its simplicity -where possible portfolio managers use plain vanilla instruments like FX forwards and options with limited use of exotic instruments - and its liquidity. Seventy-five per cent of our investments are as liquid as can be hoped for in financial markets, while 25 per cent are relatively less liquid but good amounts can be traded without punitive cost within our asset and diversification targets.
The fund structure offers monthly dealing with a 30-day notice period, and there are no lock-up periods and redemption fees attached to the fund. 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 discretionary FX, with increased market volatility and directionality since mid-2007 creating an increased opportunity set for investing.
HW: What events do you anticipate in your sector in the year ahead?
AO: We expect a year of continued high volatility and higher than usual uncertainty. This is an ideal backdrop for good discretionary currency managers. However, perhaps more than ever, a pragmatic approach and flexibility are going to be essential.
For now, there are huge opportunities as interest rates are slashed in North America while interest rate developments in Asia and Europe are more mixed. However, at some point, maybe later this year, the huge monetary easing from the US is likely to gain some traction and then we could encounter a whole new opportunity set. Again, an eclectic and flexible approach will be key.
HW: How will these developments impact your portfolio?
AO: We believe the fund is very well placed to take advantage of these developments. In the short term, trades such as long Australian dollar versus the US or Canadian dollar have worked well and should continue to perform. Australia's proximity to Asia, its commodity link and the strength of its domestic economy all argue for continued strength versus its North American counterparts.
For now there are solid fundamental drivers of currencies, though we remain very focused on positioning, technical factors and shifts in sentiment or information. We remain ready to act when the information changes.
HW: What differentiates you from other managers in your sector?
AO: We utilize a mix of fundamental analysis and shorter term technical considerations. Our approach is eclectic and pragmatic while maintaining a core investment process. We tend to take most of our FX risk outside of the G3 and outside of emerging markets. Our correlation to equities and risk assets has been close to zero or negative over the past 18 months. Since Jan 2004 the Fund has average annual returns in excess of 14 per cent and an attractive sharp ratio.
HW: What is your attitude toward risk?
AO: For our fund risk has typically been around half of out maximum allowed - 1.5 per cent daily VaR against a limit of 3 per cent. Over the past four years, and certainly since the fund's official launch last July, this has been more than adequate to meet our target returns.
HW: Are investors' expectations moving upward?
AO: I am not sure that investors' expectations have increased in a meaningful way, except perhaps at the margins in the macro and currency space as the opportunity set has increased. Within the hedge fund industry expectations have always been high, and rightfully so. Investors pay a premium price, and for that they expect premium returns.
HW: How do you distribute your products?
AO: Augustus does most of the marketing of its single-manager hedge fund products and works separately with three third-party marketers for certain customers and geographic markets.
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