Swiss-based systematic trading firm, Da Vinci Invest AG, is preparing to launch a new Cayman fund based on a proprietary strategy it’s been running since 2009, Hedgeweek can exclusively reveal. Speaking with the firm’s co-founder and CEO, Hendrik Klein (pictured) last week, the new fund will be called the Da Vinci K Squared Tachyon Fund and will use a standard 2 and 20 fee structure.
The fund will officially launch 1 January 2012 and in what is believed to be a first for the industry will use algorithms to identify economic indicators taken from news feeds to initiate trades systematically. In that sense it will be a cross between a global macro strategy and an economic event-driven strategy.
Klein confirms that the team at Da Vinci Invest have been trading Eurex (one of the world’s leading derivatives exchanges) since 1995 and as such have always focused on economic indicators. “Two and half years ago when Need to Know News came out with a computer readable news feed we immediately implemented it and started trading with our own proprietary capital in February 2009,” explains Klein.
“We’ve not had one down month since that time and this year the strategy is up 78.3 per cent with a maximum drawdown of -0.8 per cent which is incredible.”
Currently, the strategy focuses on six futures markets (three index futures, three interest rate futures). They include: The Dax, EURO STOXX 50, SMI (Swiss Market Index), the Bund, Bobl (5-year German bond) and Schatz (2-year German bond).
As the fund’s name suggests, Da Vinci Invest takes a very scientific approach to trading. In essence, the Tachyon fund works by combining co-locations with the team’s own proprietary trading skills and ability to develop algorithms that respond to the right economic macro events.
At the heart of the strategy is speed of execution and keeping latency as low as possible. That’s where it derives its name from: in particle physics parlance, a tachyon is a hypothetical subatomic particle that moves faster than the speed of light.
“We define latency as round trip order time. From the time it takes our servers to generate orders, send them to a stock exchange matching engine where they get executed, to us then receiving confirmation of that trade, we’re talking about a latency of 1.5 milliseconds at Eurex, on average,” says Klein. He adds that the fastest order executed to date was 0.6 milliseconds, the slowest 60 milliseconds.
“At some point we’ll be talking about latencies of microseconds, nanoseconds, and hopefully, at some, tachyon-like speeds. It’s a race to zero,” says Klein. He’s quick to point out that this is not a high frequency trading fund given that on some days it doesn’t trade at all. When an economic indicator signals a trade, however, the aim is to be as fast and efficient as possible.
Unsurprisingly, this type of strategy requires heavy duty investment in IT infrastructure. For it to work, Da Vinci Invest uses co-locations. In a co-location, a stock exchange allows you to put your own servers in a data centre in close proximity to the exchange’s matching engine. The precise location of the matching engine is confidential but as Klein explains, “the aim is to be within 1 kilometre of it”.
Renting rack space, buying the necessary hardware and software, getting data feeds from the exchange itself: there are a lot of costs involved. But the closer to the matching engine you can be, the more you can minimise latency. It’s something that Klein regards as the biggest threat to the strategy: “The biggest risk is that we become slow and start to miss the right trades whilst at the same time having to maintain the infrastructure. It’s all about speed of execution and developing the right algorithms based on market knowledge of economic events.”
The reason for launching a Cayman fund is to grow assets so that the firm can build as many co-locations as possible. Klein says these could include Brazil, Moscow, Beijing and London. There may also be plans to extend the strategy into other asset classes like Forex and other events such as politics and corporations, although with nuances of political speak this may prove challenging for the computers to interpret accurately.
“To keep the edge we have to constantly invest. If we keep the strategy in-house we can only grow as much as the returns allow us whereas if we manage more capital we can compete against the bigger shops. This will also enable us to subscribe to multiple news feeds, not just one. We believe this strategy is certainly scalable,” says Klein. At present, however, the fund will only be available to friends and family.
In order to tap into the more lucrative institutional investor community Klein says that a UCITS version of the fund will aim to launch in Q2 2012.
Target annualised returns for the fund will be “double-digit” according to Klein, who hopes to reach an AUM of around EUR50million within 12 months and EUR100million+ within three years.
Zurich-based Isit Fund Services are to be the Tachyon fund’s administrator and legal counsel, with Ernst & Young as auditor. BNP Paribas have been selected as prime broker.
