The Interview – Florian Wagner, Qbasis Invest: “We don’t believe the markets can throw us any challenges we have not already considered and prepared for”

Florian Wagner, founder and head of Qbasis Invest, which specialises in exchange-traded managed futures, says that after achieving returns of 72 and 145 per cent respectively in 2007 and 2008, the firm also proved the effectiveness of its systems by outperforming the CTA sector the following year despite giving back 15 per cent.

Florian Wagner, founder and head of Qbasis Invest, which specialises in exchange-traded managed futures, says that after achieving returns of 72 and 145 per cent respectively in 2007 and 2008, the firm also proved the effectiveness of its systems by outperforming the CTA sector the following year despite giving back 15 per cent.
 
GFM: What is the background to your company and funds?
 
FW: Some 10 years ago I was heading a private trading club that invested its money in the stock market. After experiencing losses in 2000-01, I decided to find a better way to invest our capital. Looking at different approaches, I got interested in systematic strategies and futures trading and researched more than 200 different trading strategies.
 
Back then we started to work with Ziad Chahal, a former commodity trading adviser who is now is our head of research and system development, and one of the principals of Qbasis, alongside Philipp Pölzl and myself. Ziad developed our MF Trend strategy, a break-out trend-following strategy, and together with a German developer and myself he worked on MF Plus, a swing/reversal strategy. We are still using those lowly correlated strategies without any changes to the initial settings.
 
In 2003 we started trading the strategies for our investment club. In 2005 we formed Qbasis Fund Management and soon after started to offer a managed account to outside investors. In April 2008 we started the Qbasis Futures Fund, using the same strategies in all these products. We are exclusively trading exchange-traded futures markets and the company currently has some USD42m in assets under management.
 
GFM: What is the structure of your funds?
 
FW: Our flagship products are the managed accounts that we have been offering since 2006. In 2008 we set up the Qbasis Futures Fund, which is domiciled in the Cayman Islands. We additionally offer a regulated exchange-traded fund based on the same strategies as our flagship fund.
 
GFM: Who are your key service providers?
 
FW: The offshore fund’s auditor is Ernst &Young, its administrator Trident Trust and its custodian Credit Suisse. We use Rosenthal Collins Group as a broker, and Solomon Harris is our legal advisor.
 
GFM: What is the profile of your client base? What is the split of your assets under management between institutional and private clients?
 
FW: Our main investors at the moment are funds of funds, banks, family offices and high net worth individuals, which are exactly the clients we target. Around 70 per cent of our assets are from institutional investors, but I think that this proportion will decline since we now also offer an exchange-traded fund, which will increase the level of investment from private clients.
 
GFM: How would you assess the impact of the recent global financial crisis and economic downturn on your business?
 
FW: Performance-wise we had the best year in our history in 2008, and we also won a few awards in that period, but it was quite difficult to attract new investors. Fundraising clearly was very difficult in the past 12 months because of what happened in 2008.
 
The crisis has offered a variety of opportunities and challenges. Market hesitation and uncertainty provided a tough trading environment in 2009 with no clear long-term trends and some wild unexpected swings on each bit of economic news. While this environment affected the profitability ratios of our trading models, we were able to limit the extent of our equity drawdown using sound and time-proven money management tactics.
 
Long-term commodity trading has proven repeatedly to be totally uncorrelated to the buy and hold strategies employed in traditional portfolios of shares and bonds. We hope that the crisis will encourage more of the investment public to consider the merits of diversifying their portfolio by including this interesting asset class in their institutional or private holdings.
 
Liquidity and transparency have become very important issues in that period, which really benefits us. We have always used exclusively exchange-traded futures, which on one hand enables us to close all positions within hours if necessary, and on the other does not provide any difficulties in valuation because they can be marked to market at any time. In addition, our new exchange-traded fund will offer daily liquidity, which is very unique for a managed futures strategy.
 
GFM: What is your investment process?
 
FW: We trade futures contracts on exchanges worldwide. The scope of our portfolio includes a widely diversified range of contracts designed to capture movements in stock index markets, bonds, currencies and commodities such as crude oil, metals and agricultural products. In each of these financial products we can either be long or short at any particular time, depending on trading signals generated by our trading software.
 
The main logic behind these trading signals can be described as a medium-term trend-following process that has been supplemented with a set of even shorter-term signals that do not require any predetermined assumption of market direction.
 
GFM: How do you generate ideas for your funds?
 
FW: Our trading is purely technical and non-discretionary. Proprietary algorithms are applied to market statistics to sense, analyse and determine questions like which trading side we should take in a specific market, what our entry and/or exit point is, and how many contracts we should carry.
 
The algorithms we use were built on the premise that even if we assume that past and future market behavioural patterns are totally random, it is still possible to generate profits by applying a non-optimised trading system that generates adequate entry/exit points and profit/loss ratios on a diversified and non-optimised portfolio.
 
We use the exact same settings of rules and parameters in all markets. The strategy is adaptive to volatility and therefore can handle markets as well as longer periods that are either highly or much less volatile.
 
GFM: What is your approach to managing risk?
 
FW: We follow a set of simple – yet golden – rules. First, each trade we take has a limited risk exposure. Any time the market moves against our position, the risk tied to this position at entry cannot/should not hurt us by more than a fraction of our portfolio size. On average this value is 0.3 per cent.
 
Exposure to any market sector should not exceed 10 per cent per system of portfolio size. Even when all the signals generated to trade in the same market sector happen to be in the same direction, the adverse move should not hurt the portfolio by more than a predetermined value. Optimally, this value is less than 5 per cent.
 
Our trading systems and portfolio design should maintain some sort of exposure to all market sectors at all times. Maintaining a diversified exposure increases the odds of limiting risks and avoids the disasters that might be associated with over-concentration in one market sector or a group of correlated sectors.
 
GFM: How has your recent performance compared with your expectations and track record?
 
FW: Our trading models were rewarded in 2007 and 2008 with truly outstanding returns of 72 and 145 per cent respectively. While our performance in 2009 was far from matching the achievements of the two previous years, this should be placed in the context of the difficult trading environment that plagued the CTA industry as a whole during a year in which the industry returned all or a good portion of what it made in 2007 and 2008.
 
We constantly monitor the efficiency of our strategies based on the entry and exit efficiency of the trading signals. With this method we can calculate how well the system was able to perform given the opportunities the markets presented. The results showed that efficiency in 2009 was as good as in 2008, even though, after making a 145 per cent return in 2008, we gave back 15 per cent the following year, and we feel satisfied at being able to outperform our peers.
 
We do not believe the markets are capable of throwing at us any sort of challenges whose possibility we have not already considered and prepared for.
 
GFM: What opportunities are you looking at right now?
 
FW: We recently launched a stand-alone programme designed to capture profits from very short-term day-trading signals generated on a diversified portfolio. We have been using the logic in our flagship product Qbasis Futures Fund for a good many years and now think it may be of interest as a separate product due to its favourable low correlation with other CTA programmes, including our own.
 
GFM: What events do you expect to see in your sector in the coming year?
 
FW: We are very optimistic about the coming months because the performance of CTAs always has been a sequence of run-ups and drawdowns. The next run-up is due to come soon, so we see the current environment as a perfect time to invest in CTA strategies.
 
GFM: How will these developments affect your own portfolio?
 
FW: As a normal part of our continuous vigilance and monitoring activity, in 2009 and again in early 2010 we took various money management decisions at the portfolio level designed to reduce the potential of correlated risks while maintaining the same leverage characteristics.
 
We hope these decisions will help us weather the difficult times – if any – and/or put us in front of the recovering programmes as soon as market conditions allow. It is important, however, not to reduce the system’s ability to achieve performance in good market environments.
 
GFM: How do you assess investors’ current expectations?
 
FW: The recent financial crisis as well as stock market performance across the past 10 years as a whole – the so-called lost decade – have definitely made investors more cautious and sceptical, but their inability to make any substantial return through traditional investments places them in a big paradox.
 
At a time when a deflating bubble has left interest rates and real estate prices at record lows and investors even fret about the safety of bank deposits, they can only wonder about the types of alternative they are offered. In our contacts with these investors we advise them of the importance of keeping realistic low expectations, understanding that absolute returns are commensurate with their own set of risks, and protecting assets through diversification, since no investment method is immune to risk.
 
GFM: What differentiates you from other managers in your sector?
 
FW: More than 95 per cent of CTA programmes are run using systematic technical trading methods. While our programme is no exception, we think we enjoy, first, stronger and more reliable trading systems, and secondly, the power of a money management approach that maximises our investors’ return/risk ratios.
 
In an industry that thrives on an average trading frequency of two times per year, there must be a reason why we have done so well with programmes with an average trading frequency anywhere between five and 50 times the industry average.
 
Our flagship product runs two low-correlated blocks. In each block a set of lowly correlated approaches is used on a widely diversified portfolio, then everything is topped with money management layers that limit risk per trade at an average of 0.3 per cent of equity and cap sector risks at adequate levels. And on top of lowly correlated performance with shares and bonds, we also have relatively low correlation with the CTA universe as measured by well-established performance indices.
 
GFM: How do you view the environment for fundraising over the coming 12 months?
 
FW: It’s getting better again. The past 18 months have been very hard; there were a lot of redemptions across the industry and less new money was invested. Fortunately we had very few redemptions, but fundraising wasn’t easy. In the past few months we have seen a lot of new investment in our products. We believe that 2010 will be a year where the most successful funds in particular will see significant inflows again.
 
GFM: Do you have any firm plans for further product launches?
 
FW: We will initially offer our new exchange-traded product in Germany and Austria, and later this year it will be made available in other selected countries across Europe. The product, known as the Qbasis Futures Fund, follows the same strategies as our offshore flagship managed account product, the Qbasis Futures Fund (Cayman), but it will have daily liquidity – which should be very appealing for many investors - and a lower minimum investment (EUR2,000). The exchange-traded product can also be used as the underlying basis for Ucits III-compliant funds.



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