Ian Langton (pictured), co-manager of Xenfin Capital’s Managed Growth Program, says that while commodity, futures and currency strategies should benefit from investors’ desire for returns that are not correlated with traditional asset classes, alternative investment managers face the challenge that as more participants enter these markets, the benefit of diversification declines and correlation with traditional asset classes increases, along with volatility.
GFM: What is the history and background of your company, principals and offerings?
IL: Xenfin Capital started out as a proprietary trading operation launched in 2009 by Duncan MacInnes and several individuals from his previous company Kineta Trading. Nicholas Hocart joined in 2009 to develop the business and improve client-facing operations.
The Xenfin Managed Currency programme was created to manage money on behalf of high net worth and institutional clients. The company currently has a number of managed products, but our main focus is the Xenfin Managed Growth Program managed by Joblu Miah and myself. The group currently has around USD150m in assets under management.
GFM: What is the structure of your products?
IL: We offer investment via managed accounts at Rabobank, our main prime broker, CFH Markets, a managed account partner, or via clients’ established custodians if compatible with our systems. This gives clients greater control over their investments as well as complete transparency, as well as avoiding fund-level fees. We are also in the process of reviewing a Ucits-compliant structure due to investor demand.
GFM: What is your distribution strategy and targeted client base?
IL: Distribution has been mainly to high and ultra-high net worth individuals, directly or through family offices. We have also been speaking to institutional investors now that we have are in our fourth year of trading and have started to acquire a good level of assets.
GFM: What impact has the recent global financial crisis and economic downturn had on your business?
IL: Over the past few years we’ve seen markets dominated by volatility and a greater correlation between asset classes, categorised by ‘risk on/risk off’, and our business has had to evolve over that period. We look more at correlation risk between currency pairs and sub-models within the portfolio, and think more about fatter tail occurrences; the credit crisis showed us how integrated the global financial markets are.
As an investment manager you may be doing very well for your clients, but suddenly you may find you’re unable to access the monies in your fund due to issues with your prime broker. Thus we only trade in the foreign exchange markets, which are highly transparent, deep and extremely liquid. We use one of the highest-rated custodians in Rabobank and ensure redemption is available to clients on a daily basis.
GFM: Please describe your investment process.
IL: The Xenfin Managed Growth Program employs a systematic approach to trading, blending short-term trend-following, short-term momentum and mean reversion strategies, while always looking to reduce volatility, especially downside volatility.
We believe discretionary trading has its place in the investment world, but it tends to have biases based on the trader’s view filter of the environment they are in and their own emotional vagaries. Systematic trading enables us to be focused and disciplined, reducing the emotional pitfalls that may lead to deteriorating performance.
GFM: How do you generate ideas?
IL: Experience from trading, research and technology play a large part. Our ideas are generated from years of observation of the markets, rooted in both statistical and economic theory. Inspiration comes from many sources, which we back-test and run live in our simulated environment. Many ideas lead to nothing; however, this is not a bad thing, as you can discount that particular idea and move on to the next! If an idea passes through our initial testing, we then try to destroy the model to find out how robust the logic is.
GFM: What is your approach to managing risk?
IL: Risk is very important to us. Our number one risk reduction strategy is to enter only into trades with appropriate risk-reward opportunity, then simply apply a stop-loss. Each model has stop-losses built in at the individual level, as well as stop-losses built into the portfolio as a whole.
Our only negative annual return to date, in 2010, was attributed to ‘Cable’ (the UK pound-US dollar exchange rate) experiencing a complete change in behaviour around the time of the UK general election. Previously Cable had been our strongest performing currency pair, but as the model’s drawdown reached the limits of its back-tested expectations, our allocation to the Cable model was progressively cut and eventually withdrawn altogether.
The model has remained in our simulated trading environment and has continued to underperform, which in hindsight leads us to believe that Cable most likely experienced a regime change that resulted in this particular model ceasing to work. You won’t always know straightaway when a model ceases to work, but you need to be able to reduce risk to particular currency pairs/models if they cease to perform in line with expectations, while still remaining able to take advantage of any upside if the model is just experiencing a protracted drawdown.
The idea is that the whole portfolio needs to perform and be robust enough for as many different types of scenarios as possible. This comes through research and testing, utilising diversification as much as possible, without hurting the upside return. We test over many different time frames, and apply numerous in and out of sample testing, looking not only at the upside equity curve, but also its correlation to the portfolio as a whole.
As any systematic trader will tell you, the easiest and most seductive error is to curve-fit, and to think the best idea that worked in the past will continue to work exactly the same in the future. We need to adapt continually to market behaviour.
GFM: How has your strategy performed?
IL: Having targeted targeting a 10-12 per cent return for 2011, our programme produced a 7.52 per cent actual return, and 15.04 per cent on our double leverage version. Although the programme slightly underperformed in comparison with back-tested outcomes, the year was marked by a lot of news events moving the markets. As our systems do not take news into account, we are not unhappy with the returns realized.
We are targeting a return of 12-15 per cent for 2012 (we were up 4.5 per cent as of the end of January) and believe our models should continue to perform well in the current environment.
GFM: Are you looking at any particularly attractive opportunities right now?
IL: As systematic traders, our models are always looking for opportunities! We cannot say what impact a Greek default would have on the general market or what the upcoming US presidential elections may do, but we wish to be part of any opportunities providing our risk-reward parameters are met.
The ongoing euro zone crisis will likely ensure we see continued above-average levels of volatility. Less mature FX markets also provide opportunities for systematic strategies, and we are constantly testing various pairs for opportunities.
GFM: What developments do you expect to see in your investment sector or industry field in the coming year?
IL: We believe that investors, having suffered from the ‘lost decade’ in the stock market, will continue to look for returns that are not correlated with traditional asset classes, which should benefit commodity, futures and currency strategies.
However, as more participants move to such markets, the benefit of such diversification reduces and correlations amongst those asset classes with traditional asset classes increases, while simultaneously increasing volatility. That is one of the bigger challenges facing many alternative investment managers and their performance, as last year proved.
We expect technology to continue to play an ever-increasing role in FX execution and liquidity sourcing.
GFM: How will these developments affect your firm and the performance of your programmes?
IL: Our approach, research and testing are all geared toward continually adapting to market changes. As volatility has trended upward, we have incorporated this as an important parameter within the systems and have benefited greatly. When this ceases to be the case, we will need to deal with this accordingly.
Our technology gives us a real edge in being able to move quickly into an opportunity. For example, we were on the wrong side when the market dropped last May as the result of a ‘fat-finger’ event. One of our mean reversion models picked up on the move within milliseconds, and we were able to take 300 points out of the market, which more than made up for the initial losses.
I should clarify that we are not high frequency and trade on average eight times a day. Our proprietary technology enables us to get into or out of a trade if it goes against us extremely quickly.
GFM: What do investors currently expect from managers?
IL: One of the primary requirements for a lot of investors is a good risk-return profile, and how well managers maintain this over their time horizon. Every manager realises that a strategy that outperforms expectations won’t be questioned, but one that underperforms will. Investors expect, and deserve, a clear, coherent and honest appraisal from the people to whom they entrust their investment.
GFM: What differentiates you from other managers in your sector?
IL: We have a plan and the discipline to follow it, we have a technological edge from having developed our own systems, and understand them inside out. We believe there is no ‘holy grail’, which means we continually need to adapt to market conditions.
GFM: How do you view the environment for fundraising over the coming 12 months?
IL: With major investment banks throughout the world reducing their workforce, a number of personnel may branch out by starting their own funds, adding competition for the overall available capital. A small number of big-name managers left banks or funds toward the end of 2011, and backed by their former institutions or former clients have already raised significant amounts of assets under management.
However a number of previously successful and well-known managers underperformed in 2011, and if they continue to do so, we feel some of that money will look elsewhere for opportunities. Established managers with a proven track record and an ability to perform well in volatile markets, as well as providers of assets seen as safe havens, stand to benefit.
GFM: Do you have any firm plans for further products?
IL: We are in the process of launching an FX market-making platform (www.xenfin.com/market-making.php ) that specialises in large (USD50m-plus) orders. This platform is a by-product of building a pool of liquidity for our in-house trading activities, but we found a many institutions were interested in gaining access to the liquidity as well as our technology, so we have spun it out as a separate business unit.