Last Monday saw New York-based GSB Podium Advisors launch a UCITS version of its global market neutral equity long/short strategy, prior to which it had been running solely in the form of three managed accounts. The GSB Equity Market Neutral (UCITS) Fund has been designed to replicate the systematic strategy whose genesis dates back to 1997 when GSB founder Shengbei Guo ran Deutsche Bank’s equity statistical arbitrage trading desk.
It wasn’t until 2005 that the strategy first appeared as a fund – the Statistical Arbitrage Fund. That same year Guo’s prop desk decided to spin out of Deutsche Bank in order to raise external assets in what became the Deutsche Bank Noetic Equity Long/Short Fund. The strategy ran until 2008, peaking at more than USD600million in AuM. After a short stint as a CIO at Galleon Quantitative Management, running the Galleon Quantitative Statistical Arbitrage Fund, Guo decided in 2010 to establish GSB Podium Advisors.
“We now have over USD190million in assets from a group of sophisticated institutional investors who have been very supportive,” explains GSB chief operating officer Ken Shoji (pictured). The UCITS fund is GSB’s first commingled fund but as Shoji confirms: “We’ve always viewed managed accounts, Cayman-based hedge funds and UCITS as integral parts of GSB’s business plan. We feel that our business infrastructure has become mature and robust enough to support a UCITS fund,” adding that the firm is focused on launching a Cayman fund over the next couple of months.
Being a market neutral strategy, the quantitative system developed by GSB focuses on share price mean-reversion and price momentum models to trade across 3,000 global stocks. As the strategy is highly liquid and diversified it was, says Guo, a natural fit for the UCITS framework. Consequently, the fund is run pari passu with the firm’s other investment vehicles.
Guo’s pedigree and track record – the strategy has, on average, returned 8.77 per cent annually from January 2005 to February 2012 – means the fund is likely to attract interest although the process of reaching out to investors has, naturally, only just started. Guo concedes that whilst Asia is definitely an area of focus where the UCITS brand is viewed positively, “for now we’re only targeting European institutions, many of whom we’ve not had a chance to speak to yet”.
The fund commenced trading on 20 March 2012 with USD22million and is expected to reach USD30million by next week according to Shoji. “As you know, in Europe there are certain rules on funds not being more than 20-25 per cent invested in a single vehicle so as the fund grows we should see investors increasing their allocations.” The fund is expected to reach anywhere between USD50-100million in AuM within the next six months.
London-based Alpha UCITS was chosen to host the fund as the firm demonstrated the structuring expertise, market knowledge and broad investor relationships that GSB were looking for. “We are extremely pleased with the first class job they’ve done in helping us launch the fund with a number of high quality seed investors,” confirms Shoji.
Commenting on the launch, Alpha UCITS CEO Stephane Diederich tells Hedgeweek: “We are very excited to have launched a UCITS fund for GSB Podium Advisors. They are, in our view, one of the best equity stat arb managers. We like the fact that historically the GSB strategy has tended to do particularly well when equity markets and other hedge funds have had a difficult time: for instance they were up 13 per cent in 2008.”
The number of UCITS funds offering investors exposure to sophisticated strategies like equity statistical arbitrage remains limited. As Diederich observes, funds like GSB that hold, on average, 3,000 global stocks with a daily portfolio turnover of 20 per cent “are not common”, and suggests that such launches are a response to increasing sophistication among UCITS investors. “It also shows that some UCITS service providers have caught up with the offshore hedge fund service providers in their ability to service demanding strategies,” says Diederich.
A number of aspects to GSB’s approach make it stand out from its selective peer group. Firstly, unlike many traditional statistical arbitrage firms, GSB uses both mean reversion and price momentum models, which often provide risk diversification during periods when the markets experience strong factor trends.
Secondly, the firm uses multiple models that operate in different volatility regimes. Thirdly, it has a strong focus on risk management, controlling leverage in a disciplined manner: leverage in the UCITS fund is almost zero at present, while that used in the managed accounts is typically 170 per cent long and 170 per cent short.
On using multiple models, Guo explains: “I would say, overall, we run about 10 types of models. They are constantly reviewed. Our primary focus each day is figuring out better ways for the models to trade, so they’ve undergone a lot of improvement over the years, even since we launched the fund for Deutsche Bank in 2005. All price updates are analysed and traded in a real-time fashion: they basically drive the system’s decision-making process.”
Each one of the models applies a set of constraints to its positions in order to reduce significant exposure to the markets. This is how the strategy achieves market neutrality. GSB also applies risk overlays to ensure that the overall portfolio stays within acceptable exposure levels. As with a lot of market neutral funds, the overall risk management system is substantial.
According to Guo, GSB applies portfolio construction and leverage management to control risk: “Our portfolio is extremely diversified by geography, markets and industry sectors. Our single largest stock positions typically comprise less than 1 per cent of the portfolio NAV. Furthermore, net exposure is generally between ± 5 per cent, and we use various hedging techniques to insure the portfolio remains broadly market neutral.”
The benefit to this is that the strategy can provide investors with low correlation to the equity markets and other hedge fund strategies. “We have supplied our data to a lot of different investors and they’ve concluded that we have extremely low correlation to other well known long-only and long/short equity funds, market neutral funds and CTAs,” confirms Guo.
Last year the strategy returned +2.47 per cent and is already up 5.07 per cent YTD. To underscore its robustness, the strategy was able to cope well with the market shake-up in 2008 when the credit crunch got underway, generating an impressive +13 per cent net return. But it could have been even better in Guo’s opinion: “Certainly 2008 was a good stress test environment. We had the short selling ban and this had a negative impact on trading. Without that ban we probably would have seen even higher returns.”
The new fund is available in EUR, USD and GBP share classes. Minimum subscription is USD1million for institutional investors and USD50,000 for retail investors.