The Interview – Gerry Aherne, Javelin Capital: “The financial crisis has changed the investment landscape by removing much of the froth in the hedge fund world”
Gerry Aherne, chief executive of Javelin Capital, says the firm’s newly-launched Global Equity Strategies Fund, which employs a combination of systematic, fundamental and tactical strategies according to the specific characteristics of individual geographic regions or sectors, is set to appeal to investors that are becoming increasingly resistant to paying for beta-generated performance.
GFM: What is the background to your company and fund?
GA: Javelin Capital launched the Javelin Capital Global Equity Strategies Fund, a multi-approach global equity market neutral long/short fund, on October 1. An Irish-domiciled Qualified Investor Fund, it is managed by Victor Pina, Steven Asprey and Stephanie Niven and was launched with GBP20m in seed capital.
The Global Equity Strategies Fund is the first fund for institutional investors established by Javelin Capital, which has a total of GBP150m in assets under management. Its launch follows months of rigorous preparation and back-testing by our experienced fund managers to ensure we are offering investors an attractive and superior investment vehicle.
As an investment professional I have managed assets for a wide range of clients including politicians, local authorities, life assurance companies, building societies, family offices and individuals, and I founded and developed a pooled fund business at Schroder with more than GBP3bn in assets.
GFM: Who are your key service providers?
GA: Our auditor is PricewaterhouseCoopers and our legal advisers are A&L Goodbody in Ireland and Ashurst in the UK. The fund’s administrator is BNP Paribas Fund Services Dublin and the custodian is the Dublin branch of BNP Paribas Securities Services, and the fund’s prime brokers are Goldman Sachs International and Morgan Stanley International.
GFM: What is the profile of your current and targeted client base?
GA: We will have a global distribution approach. Currently most of the fund’s assets consist of seed capital from Majedie Investments, which is committed for two years. Going forward we would like see a more even split between institutions, fund of funds investors, family offices and private banks. We anticipate a geographical split of 40 per cent from North America, 40 per cent from Europe and around 20 per cent from Asian-based investors.
GFM: How would you assess the impact of the recent global financial crisis and economic downturn on your business?
GA: The financial crisis has changed the investment landscape. It removed much of the froth in the hedge fund world, and now clients are focusing on alpha. With its concentration on alpha generation and beta neutrality, the Global Equity Strategies Fund is ideally placed to compete.
GFM: What is your investment process?
GA: We follow a multi-strategy equity investment approach, implementing tactical alpha, fundamental, systematic and tactical beta strategies. Using proprietary models, the team analyses which strategy is most appropriate for each region and, within that, each sector. The four strategies are uncorrelated or negatively correlated to each other so blending them within a single fund results in lower volatility and reduced risk.
Javelin Capital’s core investment philosophy is focused on the belief that global equity markets do not follow a normal distribution, with extreme returns occurring far more frequently and with greater magnitude than expected. The nature of the fat tails differs across sectors and geographic regions, with fatter or larger tails generating differentiated risk and return characteristics across markets.
Our research suggests that in the most fat-tailed regions and industries, boom and bust phenomena occur more regularly than predicted by traditional models. Here we deploy proprietary tactical strategies in an attempt to capture the market’s upside momentum while limiting downside risk.
Conversely, some markets and sectors present less significant tails, and are therefore far less volatile and with a lower propensity to trend. In these markets we implement a statistical arbitrage strategy seeking to capture short-term mean reversion.
Finally, certain sectors and geographic regions are constantly evolving as industrial and regional dynamics shift. As a result, the nature of the tails of the return distribution also alters, as does the risk and return profile. It is in these markets that we believe thorough screening and in-depth research allow us to anticipate changes in regime, and here we deploy fundamental strategies.
GFM: How do you generate ideas for your fund?
GA: Idea generation differs between strategies. Out tactical alpha strategy, fat tails in relative value, focuses on finding relative value fat-tailed pairs and works best in market-neutral fat-tailed pairs.
Our systematic strategy, arbitraging short-term anomalies, works best in mean-reverting markets – areas of the equity markets that are ‘better behaved’ such as the UK and US. We operate statistical arbitrage strategies that utilise advanced multivariate statistical techniques to exploit shorter-term pricing anomalies.
These anomalies can form across a large number of stocks, making it impossible for a human trader to capture. Our statistical arbitrage strategies are distinctly more sophisticated than many typical quant-driven market-neutral strategies such as pairs trading or relative value arbitrage.
Our fundamental strategy, screen, research, execute, operates in markets that are not obviously prone to boom and bust cycles, nor exhibit mean reversion characteristics all the time. It is deployed in sectors and regions that are constantly evolving. We use proprietary models to analyse what affects stock performance and we develop and implement screens unique to regions and sectors. Following the screening stage, in-depth research and analysis is carried out.
Our tactical beta strategy, fat tails in directional markets, works best in directional fat-tailed markets. Tactical beta is unique amongst Javelin’s strategies in that market beta is permitted.
GFM: What events do you expect to see in your sector in the coming year?
GA: We expect an increasing focus in the investment sector on how risk is managed, with investors paying more attention to volatility-adjusted returns. It is for this reason that the Global Equity Strategies Fund seeks to generate high returns with low volatility, hence producing high Sharpe ratios. It is expected that the use of systematic risk will enable the fund to return Sortino ratios in excess of its Sharpe ratios.
We also expect investors to be more concerned about the generation of pure alpha, rather than beta, to look toward market neutral strategies, and to seek funds that are uncorrelated to global equity markets. Investors will likely become increasingly resistant to paying for beta-generated performance, and with a focus on alpha, along with strong systematic discipline regarding risk management, we believe the Global Equity Strategies Fund will appear very attractive.
GFM: How do you assess investors’ current expectations?
GA: Investors’ expectations are relatively modest in the current environment. The past two years were very volatile both on the downside and upside, and 2010 has remained extremely challenging for absolute return funds. Mid- to high single-digit returns year to date for 2010 seem to be meeting most investors’ return expectations, within a relative volatility range around 10 per cent annualised.
GFM: What differentiates you from other managers in your sector?
GA: The fund is novel and innovative, particularly in its combination of systematic, fundamental and tactical strategies. We are unaware of any other manager allowing the characteristics of each individual market to inform which strategy should be implemented in particular geographic regions or sectors – most competitors deploy one approach across the board.
Furthermore, each of our individual strategies has its own novelty. For example, we believe our fundamental strategy is quite unique. Consider that its first step, a screening process, is 100 per cent quantitative; the second step of the process is the research phase, which is probably not too different to the traditional fundamental model. But there is a third step, which is how we trade the quantitatively-screened, fundamentally-generated ideas, borrowing from the techniques deployed in our tactical strategies.
Consequently, the fundamental strategy encompasses the best of three approaches: quantitative screening, fundamental research and tactical trading.
GFM: How do you view the environment for fundraising over the coming 12 months?
GA: The past two years have been very challenging for fundraising due to uncertainty in the markets, as well as various fund liquidations and redemption restrictions that have left investors reeling. The first and second quarters of 2010 saw some targeted investments in absolute return funds. In particular, those funds that have fared well over the previous two years have been most successful at capturing inflows from investors, who have largely been rebalancing portfolios rather than putting new money to work. We believe the environment will remain challenging over the next few quarters.
GFM: Do you have any plans for further product launches?
GA: Further fund launches will be announced in due course.
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