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Volatile markets play into the hands of multi-arbitrage shop

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“We really like risk-on risk-off markets. I personally think this is going to continue for some time yet. The eurozone issue is not going to be solved imminently and I expect to see a lot of volatility in the future,” comments Andris Kaneps (pictured), director of MTG Capital Management.

The firm’s investment philosophy is to generate positive long-term capital appreciation by employing a multi-arbitrage systematic trading system developed by Kaneps and his small team.

Development of the strategy has been gradual. The MTG Multi-Arbitrage Fund has been running since March 2010, but the genesis of the strategy goes back six years. As Kaneps explains: “We started out trading arbitrage opportunities in FX markets. Then, towards the end of 2008, we decided to strengthen the strategy by broadening it out to a wider range of asset classes.”

And with good reason; between November 2008 and October 2009 the NAV per share grew by 211 per cent.

The algorithm MTG Capital developed now trades a variety of markets and instruments, looking to exploit price inefficiencies in the same assets across different global exchanges. Typically these include: stocks, futures, ETFs, and FX. Trading strategies include, among others: stocks versus ETFs, ETFs versus futures, exchange-listed and OTC instruments.

Prior to launching the hedge fund the strategy was quite high frequency says Kaneps, typically trading up to 1,000 positions daily: “We’ve kept the HFT part of the strategy but we’ve also developed more long-term arbitrage strategies such as index arbitrage. We hold baskets of index futures, sometimes for up to one week.”

Since the fund’s inception it has generated an impressive 154.6 per cent in net returns, averaging monthly gross returns of 7.8 per cent. Last year, the fund returned 68.07 per cent and is already up 36.48 per cent through July 2012. Having started six years ago with limited partner capital, Kaneps and his team have built a USD25million hedge fund. “Our monthly notional turnover is USD1.5billion, which gives you an indication of the level of frequency we’re employing,” comments Kaneps.

In terms of style allocation, the MTG Multi-Arbitrage Fund is weighted 60 per cent towards futures spreading and 30 per cent equity market neutral. The other 10 per cent is weighted towards cash versus futures. The main geographical focus is Europe but with an office and staff in China, Asia is becoming an increasingly important market for MTG Capital.

The ability to constantly evolve and develop new trading strategies is integral to the firm. Says Kaneps: “We see the strategy moving deeper into equities and bonds. The business can’t rely on one strategy; you have to constantly develop new ones.”

Last September, at the height of market volatility, the strategy had one of its best months, returning 14 per cent. As the fund is trading market inefficiencies it favours whipsawing markets.

“When people ignore logic and run for safety, that’s when we start to make money. If you look at ETFs versus stocks, price inefficiencies tend to be quite narrow in benign markets, but when the markets go crazy they explode. Market volatility really helped us in all our strategies last year from stocks and ETFs through to futures,” comments Kaneps.

MTG Capital is currently setting up an FSA licensed investment manager to attract institutional money, but as with all arbitrage strategies, the fund will remain capacity constrained. “The next step is to get the fund to USD100-200million. That AUM figure will allow us to remain nimble and maximise alpha generation in the fund,” concludes Kaneps.

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