The Interview – Russell Newton, Global Advisors: “Adding to CTA positions early in 2009 was like buying insurance after your house has burned down”
Russell Newton, co-founder and head of research at Jersey-based commodity-focused hedge fund manager Global Advisors, notes that despite the more difficult environment for commodity trading over the past year and a half, the firm’s Global Commodity Systematic programme has delivered a compound return of 14.2 per cent return since its launch in 2005.
GFM: What is the background to your company and funds?
RN: Danny Masters and myself founded Global Advisors more than ten years ago. At the time, we saw an opportunity to set up a commodity-focused hedge fund, of which very few were in existence. Before establishing Global Advisors, Danny and I had worked together since the mid-1980s at Shell, then the Phibro division of Salomon Brothers and finally at JP Morgan.
Our first investment product at Global Advisors was an energy-focused discretionary programme, but over time our focus has broadened and our style has shifted, so that today we concentrate our efforts on the Global Commodity Systematic programme, a quantitative approach to commodities trading. We currently manage around USD335m split between our fund, several platforms and a number of segregated accounts.
GFM: Who are your key service providers?
RN: Our fund is administered by Butterfield Fulcrum Group and audited by Kinetic Partners, and our legal advisors are Katten Muchin Roseman. Cash management for the fund is provided by Horizon Cash Management, and we have relationships with various clearers including Newedge and MF Global.
GFM: Have there been any recent key events for your firm?
RN: A little over a year ago we moved the investment management company from London and New York to Jersey. Our focus in 2009 was to make the move as seamless as possible and settle into our new office, while causing minimal disruption to the service provided to our clients.
Prior to the move to Jersey, our trading team was located in New York and the research team was based in London. The primary benefit of having both teams working closely together in a single location is the ability constantly to generate and discuss ideas for enhancing existing models and developing new ones. The benefit for existing and prospective clients is the ability to meet all our key people in the same office.
This year, we have started to introduce more models into the strategy with the aim of improving diversification within the portfolio, while remaining focused on the commodity markets. We have been expanding the team since our arrival in Jersey and are looking to add a couple more senior members of staff in the course of this year.
GFM: How and where do you distribute the funds? What is the profile of your client base?
RN: Distribution is carried out through a combination of an internal marketing team, third-party marketers and being listed on various managed account platforms, providing us with extensive global coverage of the institutional marketplace. For example, our monthly newsletter goes to more than 2,000 recipients worldwide. A number of high net worth individuals invest with us, but the lion’s share of our assets comes from institutions.
Some of these – such as US retail public funds – are themselves collective investments. Interestingly, we also have clients who are directly involved in the commodities business. We value the relationships we have with this type of investor, as it keeps us well informed about developments in the physical commodity markets.
GFM: What is your investment process?
RN: Our process is fully systematic and has been developed specifically for commodity markets, drawing on more than 20 years of experience have trading those markets on the part of Danny and myself. We do reserve the right to deleverage the portfolio on a discretionary basis if we perceive systemic risk. For example, we did this during Hurricane Katrina and briefly during the credit crisis.
We only trade futures on real commodity markets such as oil, gas, base and precious metals, grains, meats and soft commodities. Some of our models are purely price-based and are, by and large, medium-term trend-followers. Others use a more novel agent-based approach to attempt to identify the styles of trading that work in the current market environment for a given commodity. These models can use fundamental data as well as prices, reflecting more of our commodity-specific knowledge. We think sizing and risk management are also key and have invested a lot of time trying to develop sensible approaches to position sizing.
GFM: How do you generate ideas for your funds?
RN: Idea generation for a systematic fund comes more in the form of potential for new models or agents, ideas that can come from any member of the trading or research teams. This is another reason why we value our contact with physical commodity players.
We constantly evaluate ideas for new trading systems and methodologies. Research is split between refining existing systems and developing new, complementary approaches. As well as being responsible for our ‘live’ models, each of our quantitative analysts also works on their own projects, which will then be ‘reality tested’ by Danny and myself. Ideas that survive this stage can be developed and may eventually make it into production.
GFM: What is your approach to managing risk?
RN: Risk is a key area for us. Given some of the high-profile failures of commodity traders over the past few years, we felt it necessary to focus very heavily on reassuring investors that our risk management process is extremely robust.
As well as having stops at model level, our sizing algorithms are sensitive to model performance, so during challenging market periods (such as August 2007 or summer 2008), our models have proved quick to cut risk and will only allow their leverage to creep back up as they begin to recover.
This means we always feel confident about preserving capital and living to fight another day. Our portfolio is extremely liquid, and because our target volatility range is just 10 to 12 per cent our program has very low leverage. Our average margin usage is roughly four per cent, for example, and peak gross leverage has been 130 per cent.
GFM: How has your recent performance compared with your expectations and track record?
RN: Commodity markets have been tough since the end of 2008. With the exception of precious metals, which have generally been trending higher for much of the past year or so, many commodities have been stuck in ranges – particularly when you take the steep negative carry into account. This has made it challenging for our trend-following models to thrive, leaving only our agent-based approaches making any money.
However, even with a positive performance of 1.8 per cent in 2009 and being flat so far in 2010, since the launch of Global Commodity Systematic in 2005 we have a compound return of 14.2 per cent return, with 10.6 per cent volatility and a maximum drawdown of just 5.5 per cent.
GFM: What opportunities are you looking at right now?
RN: Over the past 12 months the macro-economic outlook has been rather mixed, with Asia and emerging markets continuing to grow after a very brief interlude, Europe pretty weak and the US rather volatile. The US now appears to be recovering quite robustly, which could well lead to a repeat of the market conditions we saw in commodities around 2003 and 2004, where surplus production capacity is quickly absorbed, leaving the marginal buyer to set prices. This has historically been a good environment for our type of approach.
GFM: What events do you expect to see in your sector in the coming year?
RN: We don’t really buy into this idea, but if for some reason Greek contagion led to a global economic collapse, the resulting drop in commodity prices would be good for us too. What we don’t want to see is stability!
Our trend-following models are sensitive to turning points, as we saw that in the summer of 2008 as commodity markets reversed. Once trends – up or down, with or without fundamental support – assert themselves, we are confident our models will thrive.
GFM: How do you assess investors’ current expectations?
RN: Many investors had a pretty terrible 2008 and the knee-jerk reaction was to add to CTA positions early in 2009. This seems like buying insurance after your house has burned down, and so it turned out.
CTA performance collectively seems to be somewhat mean-reverting, and after 15 months in the doldrums we’re quite bullish about prospects for the coming year or two. But investors have been seduced by fatter returns in other sectors (in many cases, the same sectors that under-performed badly in 2008), so not everyone is listening to our story.
GFM: What differentiates you from other managers in your sector?
RN: Danny and I come from a commodities background, having immersed ourselves in these markets for more than 20 years Danny. That means the ideas that have gone into our models really are different from what you might find at other, more diversified CTAs. We think commodity markets behave differently from other financial assets and therefore warrant their own models. Investors also like our low leverage and shallow drawdowns.
GFM: How do you view the environment for fundraising over the coming 12 months?
RN: We have seen increased interest from prospective investors – I don’t think we have ever had so many conversations about our strategy. Because we limit ourselves to commodity markets, our capacity is fairly limited; we are confident about accommodating USD1bn. We expect our current pipeline to take us a decent part of the way there over the next year.
GFM: Do you have any firm plans for further product launches?
RN: We are not planning to launch any further products in the near future in order to concentrate on what is working well, but we will continue to add more models to Global Commodity Systematic. Some of these models will be shorter-term than those we currently trade, as we think this will add alpha.
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