Following two years of difficult market conditions for long/short equity manager MET Capital Management, the firm’s head Jonathan Gordon expects a return to the trending markets that enabled it to achieve extremely positive returns between 2007 and 2009, as well as a growing willingness among investors to look beyond the largest and longest-established hedge funds.
GFM: What is the history and background of your company, principals and funds?
JG: We started MET Capital Management in spring 2009 and launched our first fund, the MET Europa Fund in September of that year. We are currently looking for seed capital to launch a second fund, MET Pacific at some point this year; we have a MET Pacific managed account launching shortly, and the fund proper will be launched once seed capital is in place.
Both funds use a long/short equity, post-event based momentum strategy in their respective developed markets of Europe and Asia-Pacific. MET is run by myself, a former proprietary trader for Banco Santander and Société Générale, assisted in research and development as well as operations by Adam Foster and in trading by Cristian Eliades. MET currently has USD40m in assets under management.
GFM: What is the structure of your funds?
JG: MET is a Cayman-domiciled limited fund with no master-feeder structure. The management company is based in London and registered with the FSA.
GFM: Who are your main service providers?
JG: Morgan Stanley acts as both our custodian and prime broker, PricewaterhouseCoopers as our auditor and BNY Mellon as our administrator. Our onshore law firm is DLA Piper and our offshore firm is Maples & Calder.
GFM: What is your distribution strategy and targeted client base?
JG: Our current investor base is split between London, Switzerland and the US, and we have a healthy mix of financial institutions, individual investors, family offices, a charitable trust and a sovereign wealth advisor. Individual investors comprise 11 per cent of our investor base.
GFM: What impact has the recent global financial crisis and economic downturn had on your business?
JG: The recent global financial crisis and economic downturn have had different effects on our strategy and therefore business throughout the various cycle phases of the last four years.
The strategy responds best to trending markets in either direction. Our win-loss ratio remains unchanged at roughly 60 per cent, so for optimum performance we are dependent upon our winners being exaggerated, which they are during trending markets. Therefore the directional trends in 2008 and 2009 resulted in extremely positive returns for the strategy at 29 and 19 per cent respectively.
The last couple of years have returned markets which have been relatively flat and lacking in clear direction (2010), and where the macro headline risk resulted in markets going nowhere and the micro getting overlooked (2011). This meant that our winning positions were not strong enough to compensate for the inevitable losing positions that result from the relatively constant win-loss ratio.
However, whilst the last two years have presented us with the most difficult market conditions for our strategy we have, unlike the majority of funds in our peer group, coped well, posting a decline of 1 per cent in 2010 and a positive return of 1 per cent in 2011. Our biggest drawdown has been 5.47 per cent.
Significant numbers of Asian hedge funds closed their doors in 2011 due to poor returns; Asian indices lost more than any global, European, North American and Latin American indices. By contrast, seven-year back-testing of our Pacific strategy has produced highly favourable, risk-adjusted returns throughout a variety of market cycles. Indeed, the high levels of closure among what would have been our competitors means that capital that still wants and needs to flow into Asian markets and hedge funds should be easier to come by.
From MET Capital’s establishment we have always wanted to expand into other geographic areas. Given the similarly fragmented nature of the Asian-Pacific developed markets to those in Europe, it was natural that we chose to start testing our post-earnings momentum strategy here.
GFM: Please describe your investment process.
JG:Proprietary models screen the universe of 1,600 European stocks daily to identify companies with fresh corporate event data (earnings announcements, trading statements, profit warnings, rights issues, new products, overseas expansion, drug approvals, management changes or sales guidance) and those whose share price has experienced a significant move.
A proprietary algorithm is then applied to stocks filtered by the models. The algorithm incorporates an assessment of the historic trading and momentum of each stock, and likely future momentum of the share price.
Technical and fundamental analysis is performed by the portfolio manager on approximately 15 stocks to ascertain the likelihood of continued price movement. Stocks are also filtered for special situations (M&A activity).
Typically five stocks will be traded on a daily basis. The position size is dependent on the stock’s liquidity, market capitalisation, trading volume and historic volatility.
GFM: How do you generate ideas for your funds?
JG: As head of research and development, Adam Foster is constantly exploring the parameters within our algorithms to produce maximum returns, but the fundamentals of the strategy have remained unchanged.
GFM: What is your approach to managing risk?
JG:We launched the fund shortly after the 2008 crisis, so managing risk carefully was, and remains, at the forefront of our strategy, as can be proven by our return attributions.
GFM: How has your fund performed?
JG: The Europa Fund delivered 39, 29 and 19 per cent in 2007, 2008 and 2009, followed by the more difficult markets of 2010 and 2011. This year we are up so far just 0.30 per cent, but we anticipate returns recovering to pre-2010 levels as the European sovereign debt crisis solutions pan out and micro factors affecting stocks return to the fore.
Asian markets were inevitably less affected by the macro headline risk stemming from Europe’s sovereign debt crisis and the continuing economic woes in the US. Back-tested returns for the Pacific Fund going back to 2004 give an annualised return of 15 per cent, volatility of 5 per cent and maximum drawdown of 0.9 per cent. We expect returns to continue in this vein.
GFM: What developments do you expect to see in your investment sector or industry field in the coming year? How will these developments affect your firm and the performance of your funds?
JG: As well as expecting stocks to respond more to micro and fundamental aspects, which should be favourable for our strategy, we anticipate growth in Asia and a healthy climate for our strategy.
Both hedge funds and investors have been severely impacted by negative performance in 2008 and 2011, and everyone is responding accordingly, both in terms of risk mitigation – the much greater rise in markets than hedge fund indices this year suggests that risk management is very much to the fore – and in subscription and redemption patterns for seed and normal investment. Seed capital is flowing in bigger volumes to fewer, more established and larger names, and investment is harder to come by.
However, investors continue to seek exposure to the hedge fund space, and as returns improve for a greater number of managers we will see renewed investor confidence in more than just the bigger names.
Asia continues to be a space investors want exposure to, and given the poor returns of Asian hedge funds in 2011 and subsequent closures, the positive back-testing returns for MET Pacific put us in a good position.
GFM: What do investors currently expect from managers, and how do you deal with those expectations?
JG: Investors are still burnt from the poor returns of 2008 and the second bad hit in 2011. Consequently, they are more thorough in their due diligence and tend to be cautious about investing in newer, smaller names, but still want returns to justify their fees. We continue to place great emphasis on risk management – in fact risk controls are very much inherent in our strategy. We have always been transparent to investors and provided as much access to management as desired. Our performance is credible to date, and we anticipate a return to the strategy’s 15 per cent-plus returns in 2007-09.
GFM: What differentiates you from other managers in your sector?
JG: We are not aware of any funds using a similar strategy to MET Europa in European equities, while systematic strategies in the Asia-Pacific region are relatively rare.
GFM: How do you view the environment for fundraising over the coming 12 months?
JG: I think it will improve. There was a lot of attention given to bigger funds in 2011, but as returns for all funds improve, we could see investors allocating to a wider array of funds as well as allocating back some of the capital they redeemed in 2011.
GFM: How do you expect your business to be affected by current and proposed regulatory changes?
JG: We are monitoring the rule-making and implementation of AIFMD, but it is too early to know if any of the provisions will directly affect us in a material way. We will monitor the Ucits space and if investor appetite continues to expand at its current rate, we will look into it further.
GFM: Are you considering any mergers or acquisitions in the foreseeable future?
JG: MET Capital Management does not anticipate any mergers or acquisitions in the foreseeable future, although seeding arrangements for MET Pacific may entail some changes.