The Interview - Carlo Scevola, Leader Fund: "Markets have proved to be unpredictable over centuries of history"
Carlo Scevola, president of Carlo Scevola & Partners, which is portfolio manager to the Leader Fund, says his firm's model-driven process for investing in currency markets has been successfully based on basic assumptions that the future is unknowable and unpredictable, and that financial markets have a fractal structure.
HW: What is the background to your company and fund?
CS: Carlo Scevola & Partners is an international asset manager and business consultancy headquartered in Geneva, with a long track record of providing strategic consulting, investment management and international planning. Founded by myself in 1999, it has grown consistently since then, with 50 employees, eight offices around the world and more than USD110m in assets under management.
In 2008 it was decided to offer investment management services within a fund, and for this reason a branch in the Cayman Islands was opened. The Cayman branch serves as the investment manager of Leader Fund, which offers systematic, fully automated investment in foreign currencies.
I am president and chief executive of Carlo Scevola & Partners, Malcolm Morley is chief trader and responsible for risk management and system development, and Russel Morris is head of client liaison, compliance and system development.
HW: Who are your key service providers?
CS: Our audit firm is Baker Tilly, our fund administrator is International Fund Administrators, our law firm is Higgs Johnson Truman Bodden and our broker is NewEdge.
HW: Have there been any recent events such as fund launches?
CS: The Accelerated Alpha investment strategy, previously available only to institutional investors through managed accounts, is now offered through Leader Fund - Class A. We can now accept subscriptions as little as USD100,000.
HW: How and where do you distribute the funds? What is the split of your assets under management between institutional and private clients?
CS: We have a few marketers who distribute the fund, but the majority of investors find our funds through private researches in the various databases we are listed in. The breakdown of the firm's assets and number of accounts is 20 per cent of accounts and 10 per cent of assets from high net worth individuals, 40 per cent of accounts and 50 per cent of assets from funds of funds, and 40 per cent of accounts and 40 per cent of assets from investment banks.
HW: What is your investment process?
CS: Our process is model-driven. Proprietary software integrates the basic philosophic assumptions with quantitative and qualitative inputs in real time, and manages trade execution. Positions are continuously monitored by an in-house proprietary tracking system.
The status of each position is constantly analysed, and when indicated, the software closes or readjusts trades as necessary. To assist in decision-making, we use Monte Carlo simulations, which allow us to quickly construct probabilistic scenarios to help gauge the likelihood of various outcomes and guide the trading strategy accordingly.
I direct and oversees the entire investment process, which is based on the analysis provided by the in-house developed software system and executed automatically through the firm's servers connected with the brokers' trading platforms.
Senior investment staff has considerable input to the capital allocation and risk management process. Analysts have ongoing research coverage responsibilities with regard to specific trades and are responsible for idea generation, research and analysis.
HW: How do you generate ideas for your funds?
CS: The Leader Fund's trading niche is automated high-frequency monitoring and trading of systems that are quantitative in their approach. The basic assumptions of the investment philosophy are that the future is unknowable and unpredictable, and that financial markets have a fractal structure.
Markets have proved over centuries of history to be unpredictable. The classical approach to the markets and related financial theories, from Bachelier to Markowitz, from Sharpe to Black-Scholes-Merton, are based on incomplete assumptions that do not fully reflect the risk position and often produce poor results, despite the strong mathematical standpoint.
Markets don't move in a completely random way, but they design certain structures that repeat themselves over time (the concept of self-similarity). This way of looking at markets is based on the studies of Dr Benoit Mandelbrot, who first developed a complete fractal mathematical system, and Dr Felix Hausdorff, the first to introduce the concept of fractals in science.
Finding self-similarities in the markets is the principal goal of our research, which translates into profitable trading models that don't rely on any kind of future prediction. We specialise in the design and operation of advanced automated programs that trade 24 hours a day, running from multiple servers worldwide.
Individual trading decisions and the level of risk taken for each trade are automated within each system, but the capital allocation between each particular system is determined discretionarily on a periodic basis.
The Leader Fund's trading approach utilises the specific skills of the principals in the analysis of virtually all tradable currency pairs and synthetics, the development and implementation of world class mechanical trading systems in a highly secure manner, and the management of trading risk such that returns are accelerated during profitable periods, while losses are contained during unprofitable times.
HW: What is your approach to managing risk?
CS: We have three main views that drive our risk management philosophy. We wish to attain the highest probability of a profitable month without limiting our overall upside every month. We believe drawdowns that eat into large monthly profits to be less important than drawdowns at the start of a month that eat into capital. And we prefer to have shallow, slightly longer drawdowns than deep shorter drawdowns. This approach also protects our capital well in the event of system breakdown.
HW: How has your recent performance compared with your expectations and track record? Do you expect your performance or style to change going forward?
CS: Our recent performance is fully in line with our expectations and track record. Our investment style will not change in the upcoming future. One of its main strengths is that it has the potential to generate triple-digits returns, which is what really makes the difference in a track record over several years.
HW: What events do you expect to see in your sector in the year ahead?
CS: Leader Fund is one of the very few funds investing only in currencies. I expect that new funds will be launched in this same sector.
HW: How will these developments affect your own portfolio?
CS: New players in the field will mean more liquidity, which can only be good for our investment strategy.
HW: Are investors' expectations moving towards capital preservation? If so, how do you deal with this?
CS: Our investment approach is mainly focused on capital preservation, but at the same time it makes possible to achieve astonishing results in the proper market conditions. Our investors appreciate this, and those who have been with us for a few years now truly understand the uniqueness of our strategies. In the long run, only rock-solid strategies can survive and continue to generate positive results.
HW: What differentiates you from other managers in your sector?
CS: Carlo Scevola & Partners has significant experience in successfully trading the currencies markets. Historically, this market has had fewer instruments available to qualify and control risk than the stock and commodity markets. This situation has been changing in recent years as innovative banks and brokerages introduce cutting-edge technologies that provide opportunities to develop and implement more sophisticated trading strategies.
Our firm has positioned itself to understand and use these facilities fully to discover and implement more secure profit opportunities. Over time, this knowledge is being built into proprietary algorithms and trading systems and reflected in the track record.
HW: Do you foresee problems in raising mandates from investors this year?
CS: Having a long and fully audited track record, based on actual results, I don't foresee any problem in raising new mandates from investors in 2009. We have achieved one of the best performances in the industry in 2008 (up 16.57 per cent net of all fees), and we will continue to generate positive returns in any market conditions.
HW: Are you planning any mergers or acquisitions this year?
CS: We have always been a fully independent company, and will continue to be in the future. We have already declined generous offers in the past, and there is no reason why we should accept offers in the future now that the company is stronger than ever.
HW: Do you have any plans for other product launches in the near future?
CS: Our research team is always working on new strategies, which are tested on the markets using proprietary capital. During 2009 we might launch a couple of new products that have been performing very well during the last 18 months.
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