The Interview - Samer M. Nsouli, Lyford Group International: "Shifts in sentiment and movements across asset classes have become much more violent"
Samer M. Nsouli, chief investment officer of Lyford Group International, says the short-term focus of the Lyford Fund stands to benefit this year in an environment where the firm expects global markets to remain in a deep recession for at least the next two years while deleveraging continues and reaccelerates as more funds face redemptions in March and June.
HW: What is the background to your company and funds?
SN: I have been managing the Lyford Fund since its launch in June 2002. It is a discretionary, tactically opportunistic global macro fund that actively manages positions in equity indices, fixed income, commodity and currency instruments using fundamental research and technical analysis. Lyford trades primarily highly liquid futures and options and a large proportion of the assets is maintained in cash.
The fund seeks double-digit returns while controlling volatility and maintains a negative correlation to most major indices and benchmarks. Current assets under management total USD52m.
HW: Who are your service providers?
SN: We use JP Morgan for prime brokerage services. Our annual audit and all accounting needs are met by KPMG. Onshore, Finn, Dixon, & Herling handles all legal matters and offshore responsibility is with Higgs & Johnson. Citco Fund Services is the fund administrator.
HW: Have there been any recent changes to the management team?
SN: We have agreed terms for a new chief operating officer with a well-established background in raising capital and running various hedge fund strategies for a multi-billion-dollar fund to come on board. Before their involvement with the hedge fund, the person was an executive at a top-tier investment bank.
HW: What is the profile of your client base?
SN: Lyford has both onshore and offshore entities to handle most types of investors. Our global investor base includes family offices, high net worth individuals, private banks and funds of funds.
HW: What investment strategies does your fund cover?
SN: The Lyford Fund has two different books. A book of longer-term theme trades (one week to three months) makes up 30 per cent of the positions. These trades represent strong views that we expect to play out over time and are sized to handle intra-day volatility without breaching set risk parameters. All positions that we deem to have more than 80 per cent correlation to one another are part of the same theme and risk is gauged accordingly.
The majority of the book is dedicated to a short-term tactical approach that represents 70 per cent of the positions. The shorter-term book looks to take advantage of events on the economic calendar, intra-day price action, asset reversion to the mean, anticipation of correlation breakdowns in an array of global markets and dynamic hedging of long-term themes.
HW: What is your approach to managing risk?
SN: We strongly believe that rigorous risk management is an essential part of running our portfolio. We have a strict stop-loss of 3 per cent of net asset value on all longer-term theme trades and between 10 and 50 basis points of NAV on all short-term trades. We also have an overall hard stop-loss of 6 per cent of NAV in any one month.
Once we start to approach that 6 per cent level, we begin to pare down positions in the portfolio and reduce our value at risk. If that level is reached at any time, we will close out all positions. The liquidity of the instruments we trade allows us to collapse the portfolio in a very short time span.
A value at risk analysis of our portfolio is done daily using Riskmetrics. The previous 30 trading days are used to calculate the correlation of assets in this system. Riskmetrics is also routinely used to determine how a position would increase or decrease the value at risk in our total portfolio and a 95 per cent VaR is closely looked at.
We also perform an internal risk analysis based on our own view of correlation and volatility and converting all assets to an S&P futures contract equivalent weighting. The portfolio usually has an average margin/equity ratio of 10 per cent.
HW: Has your performance been as per budget and expectations? Do you expect your performance or style to change going forward?
SN: In the initial years of the fund we targeted Libor plus 8 per cent, but as the volatility of the market has increased in recent years we have increased our target return to Libor plus 12 per cent. We expect to outperform in high-volatility, wide-ranging markets because the majority of our returns are generated when the VIX volatility index is trading over 20.
Our approach to trading has become more short-term driven in the past two years as shifts in sentiment and movements across asset classes have become much more violent. We intend to adhere to this style of trading as we expect high volatility to remain in the marketplace for quite some time.
HW: What opportunities are you looking at right now?
SN: In general, we expect a lot of the same trends that were prevalent in 2008 to continue to weigh heavily on markets in 2009. We believe that global markets will remain in a deep recession for at least the next two years and that the deleveraging that began last year will continue and reaccelerate as more funds face redemptions in March and June.
We also believe that China's growth rate is closer to zero rather than the Chinese government's projection of 7 per cent. As a result, we expect risk assets like equities, carry trades and commodities to remain under pressure.
HW: How do you intend to take advantage of these opportunities?
SN: We are looking to short risk assets opportunistically. While our overall view is bearish, we expect large bear market rallies to unfold in the coming months that will offer good opportunities to sell risk assets. Therefore, we are looking for technical opportunities to enter bearish short-term positions while maintaining tight stop-loss levels to mitigate the near-term risk of a bear market rally.
HW: What differentiates you from other managers in your sector?
SN: Most global macro mangers have a longer-term investment horizon and trade instruments that can turn illiquid in times of turmoil. As a result, they require long lock-up periods. We offer the exact opposite. We follow a much shorter-term trading discipline using highly liquid products, most of which trade 24 hours a day. We also offer monthly liquidity to any investor in our fund and have a very diligent approach to risk management.
HW: Do you foresee problems in raising mandates from investors through 2009? If so, what factors will drive investors back to your funds?
SN: We think 2009 will be a very difficult year for managers in all sectors to raise money. That said, Lyford differentiates itself by offering many characteristics that investors are looking for, particularly in such a difficult market environment. Among other things, we have proven ability to generate true alpha in volatile markets, we have never had a losing year, we are negatively correlated to major benchmarks, and we offer monthly liquidity.
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