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WAM's Russia-focused quant strategy outperforms market

German family office and BaFin-regulated investment adviser Wermuth Asset Management's (WAM) Russia-focused quant strategy has significantly outperformed a peer group of 50 since its inception, a trend which has continued in the first quarter of 2014.

Wermuth Leveraged Quant Eastern Europe Strategy remains the best-performing Russia-focused strategy since its inception in September 2005, returning +615.5 per cent vs. +39.0 per cent for the Russian RTS Index, a price index.
 
The strategy outperformed the RTS index and the peers in the first quarter of 2014 year: -1.1 per cent vs -15.0 per cent for the RTS index.
 
Yury Roslavlev, head of research and developer of the strategy says: “An active currency overlay of up to 90 per cent of the NAV has reduced the downside significantly; the rouble had fallen seven per cent against the dollar in the first quarter. The equity trend-following component of the fund has been designed to work well when others don’t – in periods of increased market stress and fat-tail events.”
 
When asked for the outlook of Russia-focused equity-related strategies, Yury refers to some recent developments: “The negative performance reflected global sanctions against Russia after the annexation of the Crimean peninsula. In the meantime, the market has recovered from the low of mid-March - market participants seem to expect that a further escalation of the conflict is not in anybody's interest.”
 
Russian (and Ukrainian) stocks remain the world’s most unloved ones. At 4.7 on 2014 earnings, the average PE ratio is the second-lowest across all emerging and developed markets.
 
WAM says the Wermuth Leveraged Quant Eastern Europe Strategy is a proxy for the Russian market. In a rising market, the maximum exposure is 200 per cent of NAV. As in the past, returns will be best when shares have been bought at rock-bottom prices.
 
The strategy applies a long-biased, trend-following equity long/short model focusing on Russian equities. The proprietary software allows fully automated trade execution at high speed and massively reduces the possibility of human error. The combination of long and short strategies with an expected net exposure range of minus 60 per cent to plus 200 per cent allows the strategy to benefit from both rising and falling markets. The strategy is diversified among numerous long/short sub-strategies, more than 40 instruments and currency futures.
 
The main objective for this strategy is to achieve long-term capital growth with controlled risk. High volatility in the market, or in specific sectors, consistently delivers opportunities for this strategy to generate returns. Since 2010, a systematic approach is also applied to the management of the rouble exposure which allows investors to profit from a rouble appreciation against the dollar while protecting against larger rouble losses. 

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