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Hedge Fund Interview with David Ward, CIO at Conclave Capital Absolute Return Fund

Conclave Capital is a multi-strategy hedge fund focused on generating positive (absolute) returns, regardless of prevailing market conditions. It uses a combination of quantitative model driven trading and qualitative macro positioning to maximise client returns. Eurekahedge interviews its Chief Investment Officer, David Ward.

  1. Conclave Capital is an absolute return multi-strategy hedge fund designed to maximise investor returns through the use of model driven trading and low frequency strategic positioning. Along with a brief introduction and background of your company, please tell our readers a bit more about these ‘model driven and low frequency trades’.
  2. Thanks for giving us the opportunity to speak with you. We are predominantly a relative value commodity/macro volatility fund, taking smaller directional positions where we see attractive opportunities.

    The model driven approach systematically identifies opportunities, entry and exit points, which are reviewed by our investment committee against qualitative factors including the macro environment. Our investors benefit from the tremendous ‘always watching’ capabilities of the models, without the assumption-risk that has resulted in substantial unexpected losses for some purely quantitative funds.

    We position our portfolio to profit from lower frequency (weeks/months) macro trends and events.

  3. Would you describe your investment model as being strongly quantitative driven? Please share with us about any in-house proprietary models that you may have developed to complement your strategy and how well they have worked in your favour.
  4. Like most quantitative approaches, our proprietary models are statistical or arbitrage based. These are used to identify potential opportunities, entry and exit points. The danger of a purely quantitative approach is that it ignores non-model factors. These failures can have dramatic adverse effects for investors. We mitigate this through the addition of ‘human intelligence’, a qualitative filter which then screens out ‘theory strong’ but ‘real-world weak’ trades.

    On an annualised basis we have returned 40% since inception in mid-2012 with a Sharpe Ratio above 2.2. The unwinding of QE looks set to present us with further opportunities.

  5. Could you provide us with a rough breakdown of your exposure to the various asset classes? To what extent do liquidity considerations determine your net exposures?
  6. Broadly, commodity exposure 55%; macro volatility 35%; related equity exposure 10%. FX, rates and credit exposure is minimal.

    Being relative value focused, our net exposures tend to be small. Our strategies typically hold a high proportion of cash waiting for the right entry points. All products are highly liquid/commoditised (exchange traded), we do not trade anything that is at risk of a substantial margin increase or major liquidity event. As a result, we maintain very generous liquidity buffers at all times.

  7. What is the rough breakdown of your portfolio across regional mandates? How has it changed since the fund’s inception and which regions have contributed the most to your returns?
  8. Asia is a large driver of commodity prices, our exposure and returns are approximately 60% in Asia, the remainder from western markets.

  9. Could you take us through your investment process from end to end? We understand that 80% of your trade orders are never executed. At what stage of the investment process do these trades usually get filtered out? 
  10. The investment and filtering process consists of i) initial identification using systematic quantitative models; ii) qualitative assessment by an investment committee; iii) placement of orders. Filtering happens at every stage – quantitatively, qualitatively and through market forces (does our order get filled).

    Our orders are almost always placed outside the current market price, and in about 80% of cases those orders are never filled. This may seem surprising, but it is a false economy to chase a market by entering at unfavorable levels. Patience has been the single biggest contributor to our performance.

  11. Risk management is of paramount importance to a hedge fund that seeks absolute returns. What sort of risk management tools do you have in place to guard against both market and operational risk? 
  12. We use a wide array of measures to manage risk. Any singular measure by itself is largely worthless, and our toolkit includes (but is not limited to) real-time analysis of all input factors (greeks), liquidity, volatility, scenario analysis/statistical distribution, gap risk correlation/cointegration and proprietary measures, along with active management including stops and non-linear portfolio structuring. Our preferred exposure is to systematic (macro) risk, we tend to avoid trades that are heavy with idiosyncratic (asset specific) risk.

    Operationally we maintain extremely tight controls around all aspects of the business. We can trade investor funds, but require independent third party approval to move them. Monthly statements are accompanied by independent third party verification so investors have complete assurance that the funds are secure and the positions are real. Internally, trading privileges are extremely tightly controlled alongside models, systems and analytics. We use two-factor authentication, the highest available encryption and off-site backups for disaster recovery. Processes, systems and security are constantly being reviewed, and wherever possible, improved. 

  13. What profile of investors are you targeting this fund to (HNW investors, institutions), and what competitive edge would you provide your investors with, over other similar hedge funds in the market? 
  14. We target investors looking for the growth of capital. Our daily returns have a correlation of approximately 0.25 with the S&P500, and as volatility increases this will fall further – providing a particularly appealing profile to many investors.

    Our results have considerably outperformed our peers in Asia, with an annualised return of 40% and Sharpe Ratio of 2.2 versus averages of 9% and 0.9 respectively (source: Eurekahedge database).

  15. How has the fund’s location in Singapore played to your advantage? Based on your personal experience, how would you rate investor appetite for a hedge fund product such as yours in the region? 
  16. The biggest advantage with Asia is having access to news and markets before Europe and North America open. The other advantage is being able to see what is happening on the ground versus what is reported in the media. With 60% of our returns driven by Asia, it is a natural fit.

    Post-Madoff it has been difficult for smaller less established funds – ironic given Madoff ran a large well known fund. However we are seeing this change as risk appetite returns. Investors reaping the highest rewards have remained receptive to new funds which remain nimble and tend to outperform.

  17. Given the fund’s considerable exposure to commodities, what is your near to medium term outlook for precious metals; in particular for gold which was a considerable source of duress for some hedge funds in 2013.  
  18. We tend to trade commodities on a relative value basis rather than outright, so an outright view on any one commodity is fairly immaterial. We have made money on both sides of the gold trade, sometimes long, sometimes short (versus other commodities), depending on the prevailing macro environment.

    Metals tend to be less exposed to supply shocks and more demand driven, macro drivers include geo-political events, growth, consumer confidence, QE and inflation. If you believe the recovery story, then ‘risk-on’ metals with industrial/commercial uses look more interesting. If you doubt the recovery story then ‘risk-off’ metals look more interesting.

  19. Finally please share with us your high conviction themes going into 2014. How well is your fund prepared to adapt to the post QE global financial markets?
  20. Our views are that the recovery has been boosted by massive stimulus, but the unwind will take considerably more time than people expect due to unwind sensitivity – central bank rates will likely remain low for much longer than the market implies. I see this as a central theme for 2014.

    That said, we also believe that by the time inflation starts to appear in official figures it will already have built-up considerable momentum on the ground. There are many reasons for this, but in short we already observe widespread inflation in certain markets – competing forces are obfuscating it, but it is there.

    Our performance is already benefiting from the reduction in QE and associated price volatility, October was our strongest ever month (+12.7%) and January our third best (+6.9%), we anticipate 2014 will be a highly profitable year.

Contact Details
David Ward
Conclave Capital
+65 84633707