The Interview - Anita Ramachandran and Rajinder Sabherwal, Magister Ludi Capital Management: "Capturing mispricing across markets and asset classes is a richer source of returns than security selection"

Magister Ludi Capital Management portfolio manager Anita Ramachandran and chief executive Rajinder Sabherwal (pictured) say that their Global Macro Fund launched today aims to offer investors part of an allocation to alternative asset classes representing up to 15 per cent of an overall diversified portfolio, or a tactical overlay on top of an existing multi-asset class global strategic asset allocation.

GFM: What is the background to your company and fund?

AR/RS: The Magister Ludi Global Macro Fund, to be launched with USD20m on September 1, follows a global macro strategy and will invest in multiple asset classes including equities, bonds, commodities, real estate investment trusts, infrastructure, derivatives and currency across different geographical markets, by going long or short and using limited leverage based on conviction. The fund has a master-feeder structure with a US feeder domiciled in Delaware and an offshore feeder in the British Virgin Islands.

The firm's principals are Rajinder as chief executive and chief investment officer, Anita as portfolio manager, business development and commodities specialist Neeraj Parasher and client portfolio manager Sean Donohue.

The team seeded conservative and aggressive portfolios that were launched in July 2008, and the track record of these strategies reflects the philosophy and overarching investment process that will be implemented in the fund. Day-to-day management of these portfolios has been overseen by Rajinder with input from the other three team members.

GFM: Who are your key service providers?

AR/RS: Our auditor is Rothstein Kass, and our offshore law firm is Maples & Calder and onshore Behar & Berton. The fund's administrator is Viteos Fund Services, the custodian and prime broker is JP Morgan and the introducing broker is Shoreline Trading Group.

GFM: How and where do you plan to distribute the fund? What is the profile of your current and targeted client base?

AR/RS: Our asset-gathering strategy is primarily driven by the track record requirements of alternative investment buyers. During the fund's first couple of years the focus will be on high net worth individuals, registered investment advisers and family offices. As the fund's track record lengthens, we will extend marketing to mid-sized wholesalers and fund of funds. Upon achieving a commercially viable three- to five-year track record, we will begin to target investment consultants and institutional clients. Our plan is to gather assets from around the globe through our direct efforts and through partnerships with third parties.

Our current roadshows are primarily targeted at private clients and family offices, and the profile of investors at launch is predominantly friends and family. Geographically, half is from the US and half from non-US locations, primarily Singapore, Hong Kong, India, Indonesia and some European countries. We are interested in partnering with seeders and distributors to help grow the fund to its natural potential.

GFM: What is your investment process?

AR/RS: Our main thesis is that capturing mispricing across markets and asset classes is a richer, more consistent, source of returns than security selection. Valuation is a key driver to asset class and market selection. An integrated macro view is central to our philosophy, developed by harmonising signals from diverse markets, balancing risk and return across multiple dimensions, while maintaining fluidity of execution.

The investment process integrates a top-down, bottom-up and risk management view of markets to arrive at investment decisions. Once these are made, analysis of available vehicles is conducted to determine the optimum implementation of the position. Positions are based on technical analysis, analysis of money flows and current market conditions. The portfolio is monitored on an ongoing basis to ensure alignment with the integrated view and portfolio risk guidelines.

GFM: How do you generate ideas for your funds?

AR/RS: A top-down global macro scan of geopolitical risk, economic indicators, market indicators, business cycle and macro indicators is viewed in an integrated manner to generate investment ideas, and forms the basis for preliminary strategic asset allocation and leverage decisions. The team maintains a network of contacts and sources to obtain and leverage investment insights, commentaries and research.

This view is validated with a bottom-up absolute and relative valuation analysis of asset classes and categories, geographies, sectors and capitalisation categories to determine potential risk and return profiles. The view is further scrubbed for catalysts and triggers to determine the potential realisation periods of mispricing. The output of this process is our strategic and tactical asset allocation. Leverage is determined according to our conviction in the asset allocation model.

Views from both of these approaches are overlaid with a robust risk management process that constantly validates the principles of diversification and the underlying investment theme. The portfolio's asset allocation is validated on a fundamental basis for diversification of investment themes and ideas. Portfolio construction and optimisation is achieved through quantitative modelling. Further portfolio hedges are also applied episodically to reduce the riskiness of the portfolio.

The investment ideas generated through this process are translated into decisions by selecting instruments and implemented according to technical analysis and study of money flows. The portfolio is constantly monitored, risks reviewed and rebalanced accordingly.

GFM: What is your approach to managing risk?

AR/RS: Risk management is a holistic approach that permeates business and investment management and is one of the main pillars of the process.

From a business management perspective the cost of fund management is kept sensible and conservative. Our focus is on investment performance, given our philosophy that assets follow performance, with a cap of 10 per cent of the fund subscription by one investor.

Investment management risk mitigation will be achieved by implementing a lock-in provision of one year, diversification of the portfolio through a presence in multiple asset classes and going long/short, eschewing complexity by focusing on valuation and avoiding a black box approached to portfolio modelling.

From a portfolio construction standpoint, diversification helps us raise and stay on the efficient frontier, and portfolio implementation through ETFs listed on the US markets provides us with flexibility of diversification as well as liquidity and the direction of the investment thesis.

Valuation is central to identifying mispriced assets. Our strategy breadth exposes us to market signals offering a deeper understanding vital to decision-making. Our position exposures are small and medium-sized rather than a few huge bets. Incorporated in portfolio management is strong discipline to exit fully priced investments and limit portfolio losses with strict downside controls using limit-loss and stop-loss orders.

Other key risk metrics are controlled by eliminating or reducing concentration risk, by establishing limits for asset class, geography, security and investment ideas; short risk, by limiting short positions to two times the investible assets; leverage risk, by limiting leverage to two times asset under management; liquidity and valuation risk, by investing in liquid ETFs and other exchange-traded securities; and monitoring risk, keeping to between 10 and 30 positions only.

GFM: How has your recent performance compared with your expectations and track record? Do you expect your performance to change going forward?

AR/RS: As of June 30, the two portfolios seeded in July 2008 with an initial investment value of USD200,000  - one with a conservative strategy and the other with an aggressive orientation - have generated risk-adjusted returns of 60.5 and 61.3 per cent respectively, achieved with about half the volatility of the S&P 500.

Given that the volatility and market dislocations witnessed between last September and June this year  are unlikely to be repeated, we do not expect to be able to replicate this performance, but we do aim to achieve an annual return of 9 to 10 per cent in US dollar terms over a full market cycle.

GFM: What opportunities are you looking at right now?

AR/RS: At present, we believe markets have run away too fast. Our bias at this time is a neutral stance reflected in exposure in fixed income, gold and selective commodities, coupled with a small position in select emerging markets and an overlay of shorts in the real estate and broad materials space.

We have an inflationary bias in our treasury inflation-protected securities exposure for the medium haul. We believe the summer will probably be a trading market with opportunities offered in the fall and winter, when we will be ready to invest the funds on launch.

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

AR/RS: We believe the hedge fund industry and derivatives markets are likely to see a great deal of regulation, which is likely to restrict the ability of funds to leverage and to match previous returns as well as to increase costs of management.

However, we believe that given our low overheads and the flexibility that is being built into our process and organisation, we should be ahead in the game to address these regulatory fall-outs. Our portfolio implementation and platform has the flexibility and liquidity to address the regulatory requirements.

GFM: Are investors' expectations shifting between capital preservation and growth? If so, how do you deal with this?

AR/RS: Our fund is intended to be part of the allocation to alternative asset classes or unrelated real assets of portfolios representing about 12 to 15 per cent of an overall diversified portfolio, or to represent a tactical overlay on top of an already constructed multi-asset class global strategic asset allocation. Given this perspective, we encourage our investors to consider us not as liquidity providers but a portfolio diversification vehicle.

Capital preservation is one of the main principles of our investment thesis and is dealt with through the breadth of our investment strategy, which gives us the flexibility to reduce portfolio risk through investment in uncorrelated assets, maintain liquidity by restricting ourselves to ETFs and other exchange-traded securities, thereby limiting liquidity and valuation risk, and implementing strong risk management policies using trailing stops and stop-limit orders as well as strategic portfolio hedging.

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

AR/RS: We are a boutique firm with investment management as our sole line of business. The management team is entrepreneurial and shares more than 90 per cent of profit. The team subscribes to high levels of integrity, ethics and a sense of responsibility to investors. We are a group of individuals who bring complementary investment perspectives and are passionate about investment management, bonded with a strong team spirit and intense intellectual curiosity.

Being born amid the current economic crises, the team with its fresh and clean start can offer a fundamentally different and holistic perspective to portfolio construction than a legacy fund. The track record of the seeded portfolio is testament to this.

GFM: How do you view the environment for fundraising in 2009?

AR/RS: Greed and fear will bring investors back to talented managers. We will facilitate the process with our consistent performance. Meanwhile, our team has a sufficient rolodex of potential investors that we can continue to tap into.

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

AR/RS: We seeded two portfolios in July 2008 with conservative and aggressive orientations. The new fund is based on our conservative strategy, which limits leverage and is less concentrated, although both portfolios otherwise reflect similar strategies and positions. The aggressive strategy will continue to be incubated until a launch further down the line.


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