SHK Fund Management Ltd (SHKFM) manages the SHK Quant Asia Fund, a quantitative and market neutral pan-Asia equity long/short fund, with a scalable system-driven investment process. SHKFM is a subsidiary of Hong Kong Stock Exchange-listed Sun Hung Kai & Co Limited, a leading financial services and investment holding company in the Greater China region.
The SHK Quant Asia Fund was launched in June 2005 and is managed by Willy Ballmann and Tan Lien Seng. Willy spent eight years at the Government of Singapore Investment Corp (GIC), where he was a portfolio manager in the quantitative investment unit. Lien Seng worked for eight years at UBS, where he was an executive director in equity derivatives trading.
- From a review of the fund's performance
in the first four months since its inception
in June, the fund has had two down months.
How has it fared with respect to the return
and volatility targets set out in your
investment objectives? Is there a benchmark
that you normally compare your returns
We have only been running for four months now, so it is still early days. As of end of September, we are up 2.73% or 8.42% in annualised terms. We are a taking a slow and steady approach to managing the fund and have slowly been increasing our risk capital progressively.
The only true benchmark for a market/country neutral long-short fund is cash.
Does the fact that you follow a quantitative bottom-up investment approach (rather than a fundamental top-down approach, or a mixed one) have any effect on the performance pattern referred to above?
First off, all of the above-mentioned investment methods have merits. We prefer the quantitative bottom-up approach because it allows us to scan the entire investment universe of liquid Asian stocks (about 1,200+) for the best possible implementation of our factor scoring. At the same time we do get a lot of diversification out of holding a wide variety of names (refer to ../news/05_sep_SHK_Quantitative_Investing.asp for our article on the rationale of quant investing). Our portfolio currently carries more than 200 different stocks across our five core countries – Japan, Australia, Hong Kong/China, Korea and Taiwan. What drives our investment process is the "law of active management", which in simple terms means once you identify an edge, you want to apply this over a large number of independent investment decisions.
It says in your investment mandate that your style is market neutral and country neutral, but not sector neutral, and that you consider the latter a source of alpha. Could you elaborate?
Our fund is market and country neutral because we do not believe that our type of quantitative analysis in its current form is suitable for making market-timing or top-down country allocation bets. However, we do find that the model does a pretty good job without imposing sector constraints, which in many cases are ambiguous and inappropriate anyways. The output of the model implies a sector exposure based on the initial bottom-up quantitative factor scoring. So far this sector exposure has benefited from longer-term sector trends, eg, more recently the boom in energy and basic material companies. However, for risk management purposes we do limit ourselves to a net sector exposure of at most 15% per GICS sector.
How well do your active trading strategies complement each other? Are there any diversification benefits to be reaped?
Our two core strategies are a multi-factor model and a mean-reversion model. The former looks at quarterly fundamental data and longer-term price actions, searching for factor trends that will last months, if not years. A typical position stays in the portfolio for several months. The latter is much more short term and purely based on daily price action data, searching for mean reversion between related companies. A typical position stays in the portfolio for days or at most a few weeks. Clearly, the two strategies are complementary in their approach, which brings a significant diversification benefit to the table.
It is also stated that your relative value strategy is focused primarily on Japan. Would this not affect the country-neutral aspect of your investment objectives?
No. Country risk is better measured by net country exposure rather than gross country exposure. Our net country exposure is virtually flat at all times. In terms of gross exposure, a significant portion of the portfolio will always be invested in Japan since it constitutes 60% of our investment universe. As for our relative value trading strategy, access to cheap borrows, very low transaction cost, absence of stamp duties or other taxes and electronic trading capabilities (DMA) of the underlying markets are keys to success. Currently these conditions are only met in Japan and Australia. We are planning to extend our activities for this strategy to Australia soon.
Your long/short basket of equally-weighted investments is described as being generated from a multi-factor model, with monthly rebalancing. Does a shorter rebalancing period mean higher returns (because of closer tracking of trends)? If yes, are there other costs that prevent the choice of the latter?
The multi-factor model mostly takes in "slow" data, eg, quarterly earnings. In fact the only type of "fast" data that goes into the model is price action. Clearly intra-month returns are therefore not driven by the factor returns that we analyse. A one-month rebalancing cycle is adaptive enough without being overly reactive to short-term noise. A shorter rebalancing cycle would incur substantially higher transaction cost without necessarily producing any statistically significant alpha. Having said that, as part of our ongoing research, we do look into market-timing models.
How large is your fund now and what is the % distribution among the various investment strategies? Are there other funds in your portfolio?
Our fund was seeded with US$10 million by Sun Hung Kai. The distribution to the two core strategies depends on the market opportunities. Currently around 80% is invested in the multi-factor model and the balance to pair trading.
It is stated in your investment mandate that your portfolio comprises equally-weighted positions and that you do not unnecessarily optimise. Could you elaborate on the same? Could optimisation have a negative effect on returns?
Optimisation does not have a negative effect per se but there is a thin line between getting a real improvement of your investment process and data mining. Without strong evidence that optimisation can help us produce truly superior risk-adjusted returns, we prefer to use equal weighting as a basic principle. It produces the most stable out of sample results and avoids concentration of event risk.
A look at the numbers in the Eurekahedge Asian hedge fund database shows that there are about 500 funds in the relative value and long/short space, and over 60 of them are located in Hong Kong. Who do you perceive as your main competitors? What gives you an edge over them in the strategies, countries and markets you invest in?
There are very few pan-Asian, market-neutral quant funds around. At this point in time we believe we are a niche player rather than part of a big crowd. Market neutral strategies extract "pure alpha" from the markets, and offers a fund of funds manager diversification away the from the more volatile long/short universe.
Without comparing ourselves too much with others, we bring extensive actual Asian trading experience together with many years of quant research background. We are also making efficient use of new programming and trading technology, eg, contingent pairs trading algorithms, direct market access, etc. As far as we can tell, not too many managers in Asia make full use of new execution technologies.
What is your outlook on the Asian markets and their impact on hedge fund performance, for the rest of the year?
As a quantitative manager we do not have a subjective view on the markets. What matters most to us are factor trends and more generally our investment universe returns dispersion. The more there is of either, the better it is for our strategies!
SHK Fund Management Ltd
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