The Interview – Richard Bibb, AIMhedge: “Big institutional investors need to shift away from fixed income to generate a return for their clients
AIMhedge chief investment officer Richard Bibb says the firm’s combination of a systematic, emotion-free trading approach over a large, well-diversified basket of futures markets and an effective active risk management system is a very powerful argument for investors just starting to look for better-performing investments in the wake of the financial meltdown in 2008.
GFM: What is the background to your company and funds?
RB: AIMhedge is a multi strategy quantitative investment manager that applies a quantitative 100 per cent systematic approach to trading global markets. We aim to produce significant, high-quality returns for our clients through well-diversified investments in more than 70 futures and forward markets.
Our trading approach is predominantly medium-term trend-following combined with a contrarian approach. We currently manage USD85m in a variety of investment vehicles consisting of the euro- and US dollar-denominated versions of the Global Diversified Fund, as well as an institutional share class, managed accounts from USD3m and structured products through Deutsche Bank’s Select managed account platform.
GFM: Who are your key service providers?
RB: The fund’s administrator is LaSalle Global Trust Services and the custodian is Bank of America. The auditor is KPMG, brokers are MF Global and Newedge, and our law firm is Walkers in the Cayman Islands.
GFM: Have there been any recent changes to the management team?
RB:I joined AIMhedge last June as chief investment officer, responsible for all aspects of research, automated trading and technology. I began my financial career at Man Quantitative Finance in 1995 working for David Harding, one of the founding fathers of systematic trading systems.
In 1997 I moved to the research and technology area of Man Investments, where I spent 11 years running the research and technology development teams responsible for the AHL trading engine. Over these years AHL’s assets under management grew from USD300m to around USD24bn.
GFM: How and where do you distribute the funds? What is the profile of your current and targeted client base? What is the split of your assets under management between institutional and private clients?
RB: Around 80 per cent of our assets are from institutional clients, with the remainder from high net worth individuals. Our targeted base is institutional investors such as funds of hedge funds, asset managers, private banks and family offices.
We have a marketing presence, a combination of direct sales and third-party marketers, in Germany, Switzerland, London, the Middle East and Liechtenstein, and will soon have a presence in North America.
GFM: How would you assess the impact of the recent global financial crisis and economic downturn on your business?
RB: This is a difficult question as it isn’t totally clear what the final outcome of the financial crisis will be. During the downturn itself we had stunningly good performance, recording a 42 per cent return for 2008. This performance was achieved over all sectors with particularly high profits made in stock indices and industrials.
As with almost all other managed futures trend followers, the first half of 2009 was very challenging, with economic uncertainty causing erratic movements in the markets. However, by the end of 2009 the poor trading environment was reverting to a more normal situation and we were able to make good profits again.
We currently appear to be entering a slow worldwide recovery. From a our point of view this is good news as it signals a return to more predictable markets, which will result in good performance at AIMhedge, something we already witnessed in the final six months of 2009 and the beginning of 2010.
We believe the financial meltdown in 2008 offers a good opportunity for AIMhedge. The combination of a systematic, emotion-free trading approach over a large, well-diversified basket of futures markets and a highly effective active risk management system is extremely powerful.
This approach allows us to trade a large selection of markets simultaneously, making money from both rising and falling markets. Counterparty risk is kept to a minimum as all the markets we trade are exchange-based. Additionally, unlike many of our competitors, our active and explicit handling of risk means that we know and control, in monetary terms, what our maximum exposure is. The confidence of investors in our approach has been demonstrated by an increase of more than 20 per cent in assets under management last year.
GFM: How do you generate ideas for your funds?
RB: Our research department is the backbone of AIMhedge. We believe in a rigorous, highly statistical approach to trading system development. To us, simplicity is the key to robust solutions. Simple designs indicate clarity of thought and a lack of over-fitting. Our researchers come from both academic and trading backgrounds, which we believe gives us an edge when generating novel, robust trading ideas.
GFM: What is your approach to managing risk?
RB: Our trading system implements an active risk management system which, unlike the industry norm of generating value at risk-type figures, generates exact monetary risk figures. These figures are available for all our traded markets, sectors and correlated groups and for the portfolio as a whole.
Risk levels are controlled explicitly and are recalculated every time the trading system runs. Our belief is that VaR figures have very little significance in fund management as they do not, in themselves, do anything to control risk. If you are serious about risk you need to have a system in place that actively controls risk and keeps it within acceptable levels.
GFM: How has your recent performance compared with your expectations and track record? Do you expect your performance or style to change going forward?
RB: Our performance in the first six months of 2009 was, like many trend-following CTAs, disappointing, although statistically we can say that the performance was within the norms shown of our model. Economic uncertainty was the root cause, and thankfully the returns we have posted in the final six months of the year were pretty good.
Unlike our larger peers, we were notably able to maintain our gains from November through December. Movements in foreign exchange, bond and short-term interest rate markets meant that most of our competition took heavy losses in December, mainly due to an inability to diversify sufficiently in the lower liquidity markets and hence an over-reliance on profits from financials.
At AIMhedge our stringent risk management and an effectively diversified portfolio managed to limit losses. During November AIMhedge made significant profits in sugar, stock indices and metals that offset the losses in financials.
We do not expect our style of trading to change. Managed futures investments should not be seen as short-term investments and we recommend holding an investment for at least two years, although investors holding managed accounts with us have daily liquidity should they need it.
GFM: What events do you expect to see in your sector in the coming year?
RB: The obvious coming development in our sector is the planned regulatory changes by the EU for hedge funds. We believe many of these regulations have been poorly thought out and are in many cases totally unnecessary. AIMhedge is very much behind transparency – an area we excel at – but we do not feel hedge funds should be penalised for a financial meltdown that came about due to dubious practices by investment banks, poor debt ratings by the ratings agencies and inactive regulators.
We also expect our sector to see significant inflows during 2010 from investors that are currently holding large fixed-income positions re-entering the trading arena.
GFM: How will these developments affect your own portfolio?
RB: Neither of these developments should affect our portfolio or the way we trade. We have plenty of capacity in our trading system and do not trade at a size that will be affected by regulatory changes to maximum positions in certain markets.
GFM: How do you assess investors’ current expectations?
RB: Investors have had a very rough ride over the past year-and-a-half and are on the whole, looking for two things: security and transparency. This is seen by the upsurge in institutional interest in Ucits III-based investments. At AIMhedge we are responding to these changing requirements by releasing our own Ucits III product early this year. In addition we realise that investors need the security of industry-leading risk management techniques combined with a level of transparency that allows them to feel comfortable.
GFM: What differentiates you from other managers in your sector?
RB: The way AIMhedge handles risk enables us to control our returns tightly. The single most important attribute of the risk management system is that we actively control a real, quantifiable risk. The accuracy of our daily risk values is guaranteed by stops in the market for all of our positions. This means that in the event of a doomsday scenario involving a synchronised downturn, our trading system would automatically close its positions. This is significantly different from the more traditional VaR approach, which require manual interventions as VaR limits are approached.
Another interesting attribute of the risk system is its ability to control the risk associated with unexpected short-term correlations between unrelated markets, which appear much more regularly than most people would assume and can persist for several weeks. In addition to correlated risk, the system also controls market risk, sector risk and portfolio risk. All risk limits are expressed as a percentage of the portfolio.
GFM: How do you view the environment for fundraising over the coming 12 months?
RB: We are positive about the fundraising environment this year. Although worldwide economies are finding recovery slow and painful, we are entering an economic climate that is well understood by market professionals. The desire to hold very large cash positions will disappear and liquidity should start to re-enter the market. Fundamentally, fixed-income investments cannot provide good long-term returns, and big institutional investors need to shift away from fixed income in an attempt to generate a return for their clients.
We are not predicting a return to the heady heights of 2007, nor would we want such a thing, but we do believe that the world economy is on the mend.
GFM: Do you have any firm plans for further product launches?
RB: Our Ucits III-compliant fund, which will be launched in the early part of this year, should give us significant traction with the risk-averse clients we commonly see in the marketplace these days
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