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Sabre’s Style Arbitrage Fund performance shows benefits of daily rebalancing, say principals

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Performance amongst quantitative equity managers has been somewhat mixed so far this year, but the upbeat results of Sabre Fund Management’s Style Arbitrage Fund reflect the firm’s trie

Performance amongst quantitative equity managers has been somewhat mixed so far this year, but the upbeat results of Sabre Fund Management’s Style Arbitrage Fund reflect the firm’s tried and tested investment model, according to managing principal Melissa Hill.

While January was generally a good month for quantitative equity managers, many funds struggled in February and few made the most of the market rally that began in early March.

Meanwhile, Sabre posted its best-ever quarterly numbers in the first quarter with a return of 9.2 per cent for the flagship fund and 12 per cent for the Anaxis Sabre Style Arbitrage fund, a higher risk-return version. Performance reached 4 per cent in both January and March and with returns exceeding 3 per cent so far in April, the strong performance shows no sign of fading, Hill says.

She argues that Sabre has navigated these challenging times especially well because of the characteristics of its underlying quant ‘black box’. The Style Arbitrage strategy differs from most quant market neutral models because the fund is designed to be a blend of the best ideas in quant investing, combining the traditional market neutral factor-based approach with higher frequency statistical arbitrage models.

By spanning these two disciplines and by investing in a broad range of investment themes – the firm’s principals note that the fund is not just a value/momentum play – the strategy aims to provide robust returns across almost all market and volatility environments.

Hill says the second key difference between Sabre and its competitors is that strategy is primarily one of style rotation. In essence the model rebalances the portfolio daily to shift the allocation to the themes, or styles, that are dominant in the market.

‘Essentially we profit from a combination of style opportunity, straightforward model alpha, and style persistence, the nature of some equity styles to trend,’ says Sabre principal Dan Jelicic (pictured), the strategy’s architect. ‘In rational markets, investors tend to focus on certain investment themes, creating a herding effect which we can capture by being early into the emerging trends.’

He argues that the broad diversification of alpha sources, combined with the dynamic regime-switching model, has proved critical to the fund’s recent success. In January it made money across a wide range of factors, with the momentum, reversal and Sabre’s own proprietary-hypotheses information advantage factors being particularly strong, while in March the daily rebalancing process proved its worth.

‘As the market rally picked up steam in early March, our dynamic model identified the strength of the emerging value trend and steadily increased allocation to this style,’ Jelicic says. ‘This is where we have an edge – we can reallocate on a daily basis whereas many of our competitors rebalance only monthly.’

He also notes that the additional volatility in the market has also led to strong returns from statistical arbitrage models throughout the year.

As with any trend-following process, inflection points or the collapse of trends can cause a degree of pain, and the demise of Lehman Brothers and the ensuing liquidations and uncertainty that swept through the market meant a sharp drawdown for the fund last September.

However, Hill stresses that the fund has also been one of the quickest to stage a strong recovery. ‘Throughout the fund’s six-year trading history, we have seen that after periods of uncertainty the trends are even stronger when they return,’ she says.

‘We saw this following the crash of August 2007, where Sabre was one of the few quant funds to post a positive return and after which we saw a period of strong returns, and we are seeing it now. In many senses this is the perfect environment for the strategy, and we are reaping the rewards of our dynamic, diversified process.

‘We believe that Sabre’s outperformance is not particularly remarkable, simply the result of a carefully thought-out, robust investment strategy that looks well placed to deal with the worst that 2009 can throw at it.’

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