AuM: USD 1mn
Strategy: Macro Option Arbitrage
Drink: Coffee (and Bordeaux wine)
Food: Duck Confit
Restaurant: L’Atelier de Joel Robuchon
Book: Goedel Escher Bach, The Sirens of Titan
If you could time travel back to day one of your fund and have 15min with your former self to communicate any lessons you’ve acquired with the intention of saving yourself headaches, what would you tell yourself?
Go for substance and stay away from rabid bureaucrats.
How do you manage your portfolio?
I do low-frequency trading to minimize friction costs. My strategies include tail risk arbitrage, volatility arbitrage, tail risk hedging and short-term option arbitrage. They all tend to exploit misconceptions of risk and price dynamics at the scientific level. I talk about my strategies pretty openly because it’s all about risk management and market timing. That’s where the art truly is.
What is the difference between you and all the other hedge fund managers out there?
To paraphrase Salvador Dali, it’s not that I’m good, it’s that the others are so bad! [Laughter] But seriously: I think in my case it’s about trying to go beyond conventional wisdom, and for that I need to do a bunch of different things (mostly technical) that stimulate creativity. That unfortunately leaves me with very little time for marketing and fundraising and at some point I’d like to partner with someone who is great at doing that.
How do you generate alpha?
I tend to go for strategies that are persistent, scalable, reasonably liquid, and have good theoretical fundamentals. Occasionally I take opportunistic positions. I spend a fair amount of time doing research on options.
You returned over 40% over the last three years. How did you do that?
2012 was an exceptional year yielding 25% net. Since then we’ve been up 6% net p.a. which is slightly below our target range of 8-12% p.a. Because our horizon is 3–5 years we don’t easily give in to sudden panics – but we do monitor the macro environment and are ready to liquidate our positions if need be.
What does your risk management look like?
Streamlined and therefore conservative. We have a maximum 2X leverage policy (defined as capital allocation across all strategies over NAV.) For our core tail risk arbitrage strategy we currently look at the maximum theoretical loss. Perhaps that’s even too conservative. We also perform long-period backtesting (at least 10 years).
How do you see the future for the hedges fund and financial industry?
I think the future is bright for emerging managers who have real talent and business acumen. Since 2008 there has been an unprecedented concentration of capital on large funds or institutions that have become obsessed with red tape. Sooner or later investors will not only realize that they are getting subpar performance but also that they actually increased their risk. So I am expecting renewed interest in smaller funds and a more diversified allocation across managers.