London-based Chaser Capital launched its first currency fund on 14 February. David Lavers outlines the fund's strategy and investment process.
HW: What is the background to the launch of Chaser Capital?
DL: The partnership was established by three accredited investment management professionals looking to exploit certain inefficiencies present in the foreign exchange markets.
The business has focused on the development of proprietary technology and has a strong emphasis on on-going strategy development and testing.
Chaser Capital's strategy remains very unique with the partners trading their own capital to establish a strong track record before launching the Chaser Capital Currency Fund in Q1-05. Middle to back office operations have been outsourced to GlobeOp and our prime brokers are Citigroup and Deutsche Bank.
HW: Who are the three partners at Chaser Capital?
DL: I am the Chief Executive Officer, with 25 years of experience in the financial industry. I was a partner in the Nexus Capital Markets group, an affiliate of Soros Fund Management, where I headed trading and risk management. Prior to Nexus I was a partner in Omega Advisers Inc., a US-based hedge fund.
David Landi is our Chief Investment Officer. He was formerly Global Head of Technical Strategy Analysis at UBS Warburg and SBC. David was voted the number one Technical Strategist in FX by a Greenwich Associates Survey in 2000. David ran an internal proprietary and systematic fund called TQ-Fund.
Sinan Noori, our Managing Director, has worked in the financial industry for over 20 years. During his career he has worked for major investment houses including Merrill Lynch, Barclays Capital and UBS Warburg. Sinan will be the client liaison and is in charge of Marketing and Administration.
HW: What is the strategy of the fund?
DL: The Chaser Capital Currency Fund's strategy is based on a balanced portfolio approach, where smooth and consistent returns are primary objectives. The strategy uses a technical/quantitative methodology for determining trading opportunities. A discretionary overlay can be applied where appropriate to reduce the portfolio volatility if deemed necessary.
HW: What are the fund's investment objectives?
DL: We are seeking to achieve a 25% return per annum with an 8% annualized Standard of Deviation and low correlation to other managers & indices.
HW: When did you begin trading and how has the fund performed since then?
DL: We started trading on the 15th of February. Launching the fund mid-month is unusual, but we were seeding it with our own capital and wanted to start as soon as the Prospectus and OM were ready. We reported -0.9% for February. It is important to note, however, that the systems themselves were actually up small for the month but as we bought into a rally mid-month, ended up giving back some the last two weeks. March, on the other hand, was a very difficult month and we ended up down -2.60%. The model has not experienced a down month since we started live trading in June of 2004. We had always expected about 2-3 down months a year and it is unfortunate that we are experiencing them now, but are confident that the annualized returns should remain on course.
HW: What instruments do you trade?
DL: We trade spot and forwards, and we use a variety of currency pairs covering USD, EUR, JPY, CHF, GBP, AUD, CAD, NZD and NOK.
We do not trade derivatives or NDFs.
HW: How do you develop and test your trading strategies?
DL: Two simple strategies are applied to each currency to see if a currency is historically best traded as a trending or reversing strategy.
Each strategy has a money management stop-loss. The trending strategy also includes a trailing 'take profit' that kicks-in when a position is in the money in excess of 1%.
HW: How do you measure and manage risk?
DL: Risk is measured on a real-time basis, using variance analysis as well as various volatility measures. The program has been extensively stress tested using Monte Carlo simulations to determine appropriate risk capital allocation to the entire portfolio. The MC simulation allows the program to maintain a 98% probability of not hitting the monthly stop-loss limit of 4%.
Correlations between the various components of the portfolio are measured on equity return streams as opposed to the traditional log normal return. VAR analysis is looked at on a daily basis for risk reporting purposes.
HW: What is your investment methodology?
DL: It is a four-part process, best described as follows:
1) Quantitative filtering of the portfolio components through statistical run tests, fractal compression, correlation analysis.
2) Development of decision support methodology using a series of proprietary technical inputs. Stop loss levels are pre-determined by Maximum Adverse Excursion as well as trailing stops that kick in when above MFE levels
3) Portfolio Management - dynamic volatility adjusted risk capital allocation. Constant controls and awareness of correlations impacting risk tolerances in the overall portfolio. Traded instruments are then weighted by standard deviation of returns in order to smooth out the equity stream.
4) Stress testing is an ongoing process as well as monitoring of any deviations from simulated to actual returns. The chance of curve fitting is minimized in our view as the methodology uses a single independent variable. Testing includes Mann Witney, Bootstrap, Wilcoxon and Statistical T-tests.
HW: What differentiates your fund from other currency funds?
DL: The Chaser Capital Currency Fund has been designed to fit within a professionally managed diversified investment portfolio. The fund uses a proprietary methodology and has a proven track record as well as a very low correlation to other hedge fund managers and benchmark indices. The program has been extensively stress tested and has been trading live since June 2004 having substantially out-performed other funds in its peer group.