The Interview - Anthony Limbrick, Pure Capital: "Alpha - if it actually exists - is the timing of beta alone"

New Zealand-based quant manager Pure Capital is about to launch its first pooled fund, the Guernsey-based Pure Protection Fund, alongside its range of managed account strategies, and chairman and chief investment officer Anthony Limbrick says the firm is also looking at establishing funds that trade global emissions and global food products.

HW: What is the background to your company?

AL: Pure Capital was founded in April 2005, after a core group came together in early 2004 to launch a quantitatively-driven alternative investment management business. The objective of the business was to research and implement a range of theories I had developed over 15 years of experience in the financial markets.

The initial team was comprised of Dr Siva Naguleswaran, Hamish Limbrick and myself. Since then the complement has grown to 11 people covering a wide range of investment and business functions. There are five full-time employees with the others acting at director level or on a part-time basis. The first now has USD43m in assets under management.

I have a total of 19 years' experience in the financial markets working for a variety of global financial organisations, involving directional and relative value trading in global equities, fixed income, currency and commodity markets as well as derivatives on these asset classes.

In addition to my role within Pure Capital, I am a member of the investment committee of 36 South Capital Advisors, a London-based hedge fund manager specializing in volatility and tail risk trading, and of Argyll Investment Services, a Guernsey-based asset management firm.

I am chairman of the New Zealand Absolute Return Association, the industry body representing the country's alternative investment industry. Within Pure Capital, I am responsible for investment management and research and development as well as maintaining an oversight role.

This month the firm will launch the Pure Protection Fund, a Guernsey-domiciled, US dollar-denominated cell of the Pure Capital Protected Cell Company that will be listed on the Channel Islands Stock Exchange. The fund is a joint venture with Argyll Investment Services. We plan to launch a series of funds as cells of the Pure Capital Protected Cell Company.

Pure Capital already offers a range of managed account strategies comprising the Global Equity Protection Program, Global Diversified Beta Program, Pure European BetaMatch, Pure Japan BetaMatch, Pure Carbon and New Zealand Dollar Hedging Program.

HW: Who are your key service providers?

AL: Pure Capital's auditor is Ernst & Young, but the Pure Protection Fund will be audited by KPMG. Our brokers are Morgan Stanley and NewEdge, the fund administrator is Legis Fund Services and the custodian is Butterfield. Pure Capital's legal counsel is Minter Ellison Rudd Watts.

HW: Have there been any recent key events such as fund launches or changes to the management team?

AL: The management and shareholder group has been stable since inception. We are looking to hire some additional staff for New Zealand and are in the process of setting up a regulated entity in London.

HW: How and where do you distribute the funds? What is the profile of your client base?

AL: We have only institutional or wholesale-level clients. The majority of our assets under management come from offshore domiciles.

HW: What is your investment process?

AL: Our investment process represents a quantitative rules-based implementation of the market insights I have gathered as a result of 19 years of observing and experiencing markets, observing traders and trading on a proprietary basis and for my own account. These insights have been structured and codified by Naguleswaran and Hamish Limbrick, who are both directors of Pure Capital Research, the parent company of Pure Capital.

A core belief is that alpha (if it actually exists) is the timing of beta, and the timing of beta alone. Although often positioned as alpha, incremental revenue generation in a trading strategy is most likely the monetisation of various risk premiums. The monetisation of these risk premiums manifest as exotic betas, but this is not alpha.

Our approach is to generate pay-offs representing exotic betas, then to time those betas. We have developed what we call the second derivative overlay to generate alpha from our underlying exotic betas. This uses a combination of quantitative techniques to forecast market characteristics and actively manage performance parameters.

We can generate a range of exotic betas that correlate both positively and negatively with equity, bond, currency and commodity betas, as well as gamma and vega characteristics of those markets.

Our current product range provides a dual-sided pay-off in a range of underlying betas, both simple and exotic. Where we see our alpha is in the mitigation of the associated negative pay-off in non-optimal trading environments.

HW: How do you generate ideas for your funds?

AL: Our product offerings have as a central development tenet solving a client problem. So everything we do is based on finding a specific client problem, analysing that problem, then developing a customised portfolio solution using our proprietary technology.

If a client has a problem, it is likely others have a similar problem. Once we have confirmed the existence of a widespread problem, we roll out an off the shelf product such as the Pure Protection Fund, which is the answer to the problem of pervasive equity beta and gap risk in funds of funds and hedge fund portfolios.

HW: What is your approach to managing risk?

AL: The underlying exotic betas incorporate systematic trade protection and capital protection mechanisms.

HW: How has your recent performance compared with your expectations and track record?

AL: Our current product range is correlated with vega, gamma and kurtosis surges in the markets we trade, so a significant contraction in these quantitative measures will undermine our return expectations. Against that, our risk management approach is based on minimising drawdowns in these environments.

Our performance in the majority of our product offerings has been strong since inception. Our longest running product, Pure European BetaMatch, returned 79 per cent on funds managed in 2008, generating a 15.9 per cent overall return for the portfolio it was a part of. To date this year it has returned 20 per cent, resulting in a pan-portfolio pay-off of 4 per cent.

HW: What opportunities are you looking at right now?

AL: We are looking at inflation, portfolio protection against equity and currency beta, and carbon.

HW: What events do you expect to see in your sector in the year ahead?

AL: We expect another surge in volatility as equity markets test the lower end of the past 12 months' ranges and risk premiums sharply widen. This will be positive for our product range.

HW: How do you deal with investors' focus on capital preservation?

AL: The Pure Protection Fund and our Global Equity Protection Program are responses to an increasing awareness that structural portfolio protection is an essential requirement for a balanced portfolio performance. This structural protection must justify its existence through the investment cycle in order to find its way into portfolios.

HW: What differentiates you from other managers in your sector?

AL: First, our central investment management tenet is solving client problems. Everything we do is about finding a problem we can fix, and providing a product for that.

Secondly, we are providers of targeted non-correlation, not just incidental non-correlation. We are not just about providing positive returns through the investment cycle - we shape returns.

In addition, we are also happy to provide customised portfolio solutions as small as USD5m.

HW: Do you foresee problems in raising mandates from investors through 2009? If so, what factors will drive investors back to your funds?

AL: We see the current environment as positive for our product set. Investors can make the decision to invest in our product and protect their downside while also understanding that the upside is not capped in the long run - and in the end may even be enhanced.

HW: Do you have any plans for other product launches in the near future?

AL: We are looking at launching the Pure Carbon Fund, trading global emissions, and the Pure Food Fund, trading global food products, with a significant proportion of Pure Capital's revenue from this fund going to food charities.



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