The Interview - Troy W. Buckner, Managing Principal, NuWave Investment Management: "With market fundamentals in flux, technically-oriented traders will have the upper hand"
Managed futures isone of the few alternative investment strategies that tends to
demonstrate negative correlation to traditional investments during
stress periods for the equity markets, says Troy W. Buckner, managing
principal of NuWave Investment Management, and thus offers true
diversification when it's needed most.
GFM: What is the background to your company and fund?
NuWave Investment Management specialises in quantitative trading
strategies and their application to financial and commodity markets.
The firm offers diversified directional futures methodologies, as well
as equity long/short market-neutral strategies, and manages total
assets in excess of USD500m.
The firm was launched in early 2000
in an effort to capitalise on directional trading opportunities
frequently missed or ignored by long-biased investors and most hedge
funds. Since its inception, NuWave Investment Management has combined
ingenuity, insightful research and cutting-edge technology to navigate
successfully the complexities of global investing.
multistrategy, pattern-based approach to investing in many of the
world's most liquid financial and commodities markets offers investors
the potential to achieve compelling risk-adjusted returns in a variety
of market environments, while also providing significant
diversification and non-correlation benefits relative to both
traditional investments and other hedge fund strategies.
firm's systematic trading methodologies employ a sophisticated form of
'pattern recognition' theory to identify and capture repetitive
historical tendencies in price movement that occur across a broad array
of markets and time horizons.
The repetitive nature of these
patterns results from a wide variety of technical and fundamental
factors, including prospects for global economic growth, the prevailing
environment for interest rates, the effects of dramatic geopolitical
shocks and the cyclicality of seasonal or weather-related concerns.
GFM: Who are your key service providers?
NuWave maintains its primary futures clearing relationship with Newedge
and a prime brokerage relationship for its equity trading with Goldman
Sachs. Audit services are conducted by Rothstein Kass. Administration
services are provided by AIS Fund Administration, while US legal
counsel is Kleinberg, Kaplan, Wolff & Cohen and offshore legal
counsel is Appleby (Cayman Islands).
GFM: Have there been any recent key events, such as fund launches or changes to the management team?
Weynand recently joined the firm's management committee as managing
director of business operations and will assume a senior leadership
role as NuWave continues to strengthen its management team and enhance
its operational infrastructure. He has spent nearly 20 years in the
alternative investment industry including key management positions at
Graham Capital Management and Campbell & Company, after more than
13 years at Morgan Stanley.
On the product side, we continue to
respond to investor demands for enhanced transparency and increased
liquidity by offering managed accounts, as well as introducing weekly
liquidity into our fund vehicles.
GFM: What is the profile of your client base?
NuWave seeks to attract a client base that is well diversified by
investor type and geography. Presently, the firm's investors include
pension funds, fund of funds, family offices and private institutions.
Almost 60 per cent of our assets originate from the US, while with the
remainder primarily from Europe and Japan.
GFM: What is your investment process?
NuWave employs a rigorous and disciplined investment process. The firm
defines a matrix of logical and mathematical values associated with a
given market's time series in order to define a 'profile' of current
price activity for that specific market. Thereafter, pattern
recognition algorithms are used to sift through time-series data, with
the goal of identifying historical analogies from which to predict
directional price behaviour.
Although no two profiles are
identical, similar profiles can be identified from which one may infer
directional price opportunities. These opportunities often differ
significantly, varying in terms of duration from mere hours to many
months and direction, at times running with the prevailing trend, while
at other times running counter to the prevailing trend. The result is a
return profile distinct from and less correlated with those of
traditional investments and other hedge fund strategies.
GFM: How do you generate ideas for your funds?
At NuWave, we pursue a dynamic approach to research in which academic
and market-based initiatives are vetted, modelled and simulated within
the confines of a proprietary research and development platform. This
enables researchers to design virtually any conceivable price-based
investment strategy or risk management tool consistent with our basic
theory of repetitive market tendencies.
Full-scale Monte Carlo
simulations aid in the modelling process and help ensure a robust
statistical result. Virtually every aspect of trading and
risk-management can be modelled, simulated and customised, including
signal generation, risk control, position sizing and trade execution.
Specific sub-models may be isolated for further study or independently
stress-tested, or the characteristics of multiple sub-models may be
modelled simultaneously with an eye to enhancing the risk-adjusted
returns of the overall portfolio.
GFM: What is your approach to managing risk?
History tells us that investing in the global financial and commodities
markets is at once fraught with uncertainty and opportunity. Careful
attention is paid to a variety of risks, including market risk,
portfolio risk and execution risk. The firm's strategies identify
complex relationships across an increasingly interdependent world,
while seeking to capture significant directional price movements in a
variety of commodity and financial markets.
The firm utilises
volatility as a key component in determining a wide variety of
proprietary parameters for an individual market, and individual market
exposures are managed in a manner that attempts to equalise risk across
all positions. Portfolio construction includes multiple sub-portfolios
that trade short, intermediate, and longer-term cycle lengths.
is acquired opportunistically according to model-based forecasts.
Multiple constraints exist to minimise aggregate risk across the entire
portfolio, especially when unique markets begin moving in tandem. Value
at risk measurements, sector concentrations, individual market
exposures, stress-test findings and overall leverage are each
constrained within acceptable levels.
GFM: What opportunities are you looking at right now?
We anticipate that market volatility will remain high for the
foreseeable future and that unprecedented global stimulus and central
government borrowing will result in stock, bond, currency and commodity
price dislocations. Common sense would suggest the potential for rising
interest rate pressure and commodity price inflation, but proper timing
of trades will not be obvious. It will likely be an environment where
market fundamentals will be in flux, and technically-oriented traders
will have the upper hand.
GFM: What events do you expect to see in your sector in the year ahead?
An increasingly interdependent world may periodically cause historical
correlations among individual markets and market sectors to break down,
and market fundamentals will be increasingly difficult to interpret. A
portfolio of historically non-correlated assets may turn highly
correlated virtually overnight, confounding even the most sophisticated
risk management techniques. I expect the potential for continuing
stress events to continue well into the future.
GFM: How will these developments affect your own portfolio?
The lesson is to gauge aggregate portfolio risk in light of both
accepted norms and historical anomalies. NuWave has engineered a
proprietary risk overlay that sits on top of the aggregate portfolio,
and individual trades derived from the firm's core trading logic are
systematically accepted or rejected according to an analysis of rolling
market sector correlations and a measurement of directional 'stretch'.
This risk overlay is a key component of the firm's risk management
strategy and f our overall investment methodology.
GFM: Are investors' expectations still moving toward capital preservation?
While investors were moving toward capital preservation during the
fourth quarter of 2008 and the first quarter of 2009, recent market
activity leads me to believe that investors are tepidly looking to
place assets once again. Investors are clearly interested in avoiding
the liquidity trap that prevented exit from many hedge fund strategies
in 2008 and early 2009, which has fostered an interest in liquid,
transparent alternative strategies that are not correlated with
traditional, long-biased investments.
As always, the key to
intelligent asset allocation is diversification and non-correlation.
NuWave's investment methodologies, like many managed futures
strategies, have demonstrated an ability to deliver risk-adjusted
returns over time that are non-correlated to traditional strategies and
other hedge fund strategies.
In fact, managed futures is one of
the few alternative investment strategies that tends to demonstrate
negative correlation to traditional investments during stress periods
for the equity markets, thereby offering true diversification when
GFM: What differentiates you from other managers in your sector?
While many managers within the global macro/CTA space seek to identify
directional opportunities across the financial and commodities markets,
NuWave does so in a patently different way, resulting in a unique
Rather than pursuing a traditional
trend-following approach, commonly based on momentum-based or break-out
theorems, the firm instead employs a trend forecasting model largely
based on pattern recognition theory. The result is often a marked
difference in risk/return during certain inflection points in the
markets, for instance in the timing of entry and exit signals, yet a
proven historical ability to capitalise on directional price movements.
GFM: What is your experience of investor attitudes and the environment for fundraising in 2009?
the post-Madoff era, there is a desire for increased transparency as a
growing number of investors request managed account structures, while
those willing to invest via commingled investment vehicles seek
enhanced liquidity, independent valuation, reduced counterparty risk
and third-party oversight.
At NuWave, many of the firm's
investment strategies are offered via managed accounts or commingled
investment vehicles, providing the utmost in both transparency -
including the ability to view positions on a daily basis - and
liquidity, offering daily, weekly or monthly liquidity, with no gates
Furthermore, all instruments traded by NuWave are
listed on regulated exchanges, simplifying the complex valuation issues
often associated with other alternative investment strategies, while
well-capitalised clearing houses serve as counterparty to virtually all
the firm's trading activities, minimising certain risks associated with
individual counterparty exposures.
Lastly, the firm's activities
are subject to independent audit and are regulated by a variety of
government and industry self-regulatory agencies. In a nutshell, our
style is liquid, transparent, and capable of making money when others
cannot. These factors have fuelled significant inflows to our
portfolios thus far during 2009, a trend we expect will continue.
GFM: What are your views with respect to the further consolidation of the industry?
The past year witnessed an intense consolidation in the hedge fund
industry, as many alternative investment strategies once thought to
provide portfolio diversification proved highly correlated to the
equity markets. Going forward, we expect further consolidation among
funds of funds, while investment strategies that offer proven
diversification and non-correlation over time will continue to garner
assets, with a premium placed on liquidity, transparency and
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