Fri, 15/07/2011 - 12:37
Jacques Lucas, president of Paris-based manager Exqim, says the firm stands out from other hedge fund managers through its development of fully quantitative management focused on high-level internal research with minimal human intervention, characterised by systematic and fully automated processes for the strict management of risk limits and the exclusively electronic trading of liquid assets.
GFM: What is the history and background of your company, principals and fund?
JL: I founded Exqim – it stands for Exclusive Quantitative Investment Management – in 2009 with three partners, and the firm was approved by France’s Autorité des Marchés Financiers at the end of that year. Philippe de Gouville, who worked with me for 10 years as head of portfolio management at Société Générale Asset Management joined me in this project and is now a director of Exqim.
Philippe shared my ambition of creating an innovative and ambitious management concept based on a quantitative management and strategy allocation process. We have created an innovative multistrategy fund based on an automated and integrated process. The other director is Jean-Guillaume Grebet.
Exqim Funds is a Luxembourg Sicav-SIF in the form of a public limited company. The Exqim Blue Fund invests in a diversified portfolio of assets according to systematic and quantitative trading strategies proprietary to the investment manager. The assets of the fund are automatically and systematically traded on electronic platforms of regulated or recognised markets.
Investment decisions are made by automatic processes based on mathematic algorithms, limiting human intervention. The mathematic models used are based on the latest theoretical developments and their implementation uses cutting-edge IT systems and order-routing techniques.
The sub-fund favours worldwide assets that are highly liquid and tradable on electronic platforms, including developed world equities, liquid futures based on underlying assets such as equity indices and commodities, and the main forex crosses.
GFM: Who are your main service providers?
JL: Caceis Bank Luxembourg is the custodian and paying agent, central administration agent, domiciliary agent, registrar and transfer agent. The prime broker is Morgan Stanley International in London, the auditor is KPMG Audit in Luxembourg, and the fund’s legal adviser is Elvinger, Hoss & Prussen.
GFM: What is your distribution strategy and targeted client base?
JL: Our first objective is to raise EUR100m by the end of the year. Initial seed money has been invested by the founding partners, and their commitment has already convinced private investors.
The business development team is made up of two experimented professionals who will focus initially on high net worth individuals and family offices in Europe. The second round of our marketing development will focus on institutions and funds of funds, first in Europe then in Asia, and distribution agreements have already been signed with private banks. We aim to reach EUR1bn in assets under management by 2015.
GFM: What impact has the recent global financial crisis and economic downturn had on your business?
JL: The crisis redefined asset management and created new needs and demands for investors: more transparency, better liquidity and more control. It was an opportunity to establish an ambitious project with shrewd timing, to be ready for the end of the crisis. We invested in innovation, our founding members' experience and an entrepreneurial team rather than building the project around a ‘star’ manager.
GFM: Please describe your investment process.
JL: We currently employ five types of strategy: equity market neutral, global index statistical, volatility index arbitrage, fixed income relative value and global market quant trend. Overall, our quantitative management team looks for repetitive behaviour on markets that can be exploited.
The five strategies are the result of a selection process that culminates in them being certified as appropriate by the management committee. The number of certified strategies is considerably lower than the number of strategies tested. After several months of studies, tests and validation, the new strategies are eligible for investment and can contribute to the diversification of our fund.
Our strategy allocation engine, another essential component in creating performance, determines the weighting of strategies in the fund. The weights are updated periodically.
GFM: How do you generate ideas for your funds?
JL: The management team consists of individuals with more than 20 years of experience in financial markets. They regularly feed the quantitative research team with trade ideas to detect potential statistical arbitrage or repetitive behaviour. Conversely, the quant team screens our eligible investment universe and submits extensive statistical tests and data-mining algorithms to discover and to identify such behaviour.
We are also interested in adding new eligible assets to our management process. Due to their great diversity and increasing liquidity, ETFs will be soon added to our list.
GFM: What is your approach to managing risk?
JL: We are confronted by three sorts of risks: market risk, operational risk and strategic risk. Market risk is monitored via real-time indicators – if a limit is exceeded, an automatic procedure is triggered.
Automation and minimal human intervention reduce operational risk. An activity continuity plan means that the activity can be continued in the event of a major incident anywhere in the production line, unless markets themselves shut down or are unable to publish data.
Risks regarding strategy models are taken into account in the tests and validation processes of the new strategies. Two committees must validate the production of each strategy. After the research and backtesting phases, a pre-validation committee determines the strategy's potential, then, after an exhaustive battery of tests has been carried out and the limits to be followed have been determined, the certification committee validates the strategy definitively. All our strategies are periodically reviewed and can be withdrawn if necessary.We have a dedicated, autonomous, technically and scientifically high-level risk management team.
GFM: What developments do you expect to see in your investment sector or industry field in the coming year?
JL: For the time being, Exqim does not have any high-frequency strategies, but this relatively new type of strategy is a natural development for algorithmic trading and Exqim will explore the domain.
In our view, high-frequency trading will not be banned, but controlled, notably to avoid market manipulation and strategies that flood the market with quotations and order cancellations. So far, high-frequency trading strategies have been feeding liquidity and are now a vital component of trading. Who could accept the disappearance of half the liquidity?
Contrary to the market, machines cannot spiral out of control. Exqim has developed circuit-breakers and filters both on data and orders (notably in size and cumulative volume) to monitor efficiently message traffic to and from the market.
GFM: How will these developments affect your firm and the performance of your fund?
JL: Exqim positions itself as an incubator of proprietary quantitative strategy. We will explore any type of new strategy along with the markets’ development and new regulations. Every new strategy must pass robustness and performance tests, and comply with our internal eligible assets rule.
Innovation will be a key factor in performance and differentiation in our industry in the coming years. Ultimately, the more strategies you add, the more diversification you get. The goal is to have a fund with high levels of decorrelation.
GFM: What do investors currently expect from managers, and how do you deal with those expectations?
JL: Investors are obviously seeking primarily performance, but it cannot be achieved at any price, and many other factors are involved in any investor’s decision.
We have deliberately chosen to invest across the complete spectrum of asset classes. While diversification can restrain performance in the short term, it brings stability in the medium term.
To analyse and invest across so vast a universe, we have built a dedicated platform to compute all trading orders simultaneously. Since liquidity and transparency are a growing concern for our investors, we have decided to invest only in liquid and listed assets and to disclose a full breakdown of our portfolio to our clients on a monthly basis.
GFM: What differentiates you from other managers in your sector?
JL: We decided to develop entirely quantitative management focused on high-level internal research and with minimal human intervention. The main differences are the systematic and fully automated methods for the strict management of risk limits, and the instruments traded by Exqim, exclusively made up of liquid assets that can be traded electronically.
In contrast with many other hedge fund managers, we have created a unique diversification based on strategies, underlyings and investment frequencies. Our innovation allows us to explore investment strategies that are not always intuitive and are often ahead of the market.
GFM: How do you view the environment for fundraising over the coming 12 months?
JL: Fundraising will remain challenging over the coming 12 months, but we have very encouraging signs from investors. There is increasing demand for innovative concepts in the world of hedge funds. Clients we meet, particularly funds of funds and family offices, are really interested in our project. We represent a new axis of diversification for their portfolios.
GFM: Do you have any firm plans for further product launches?
JL: As the US markets represents 55 per cent of the hedge fund market, we plan to launch, some time in 2012, a vehicle adapted to this market with exactly the same investment process.
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