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The Billion Dollar Hedge Fund Interview with Eric van Sprang, Partner and Menno Dreischor, Partner at QTR Invest

QTR (Quantitative Trading Research) Invest has its origin as a retirement plan of three entrepreneurs. With good skills in data-analysis and a common sense, a quantitative trading strategy was developed. Because of the chemical scientific background of the founders, the trading strategy was based on conceptual ideas from chemical and pharmaceutical process & product development.

After a successful trading period, the strategy was implemented in the QTR fund. The main goal of the fund is to generate long-term returns that are stable and risk averse. This goal is completely in line with the original thought of the founder's retirement plan.

The mission of QTR Invest is to realize stable returns with acceptable risks. To accomplish this mission, QTR Invest maintains a continuous improvement program. This program not only assures improvement of existing trading ideas. It also provides a solid base for development & implementation of new trading technologies. Therefore, valorizing complex financial data is the core purpose of QTR Invest.

Eurekahedge: The QTR Fund consists of scientifically developed quantitative models that trade worldwide. Please tell us a little bit about the quantitative models used? (E.g. trading fundamentals or technicals etc.) Is there any human input in your investment decision-making

Price movements of financial products fluctuate continuously through the influence of market conditions. QTR uses different quantitative models to identify these price movements. By combining strategies, it is possible to generate returns within a broad range of market conditions. Furthermore, spreading risks over multiple strategies results in a more stable portfolio. When the markets show no clear price-movements, the portfolio records lower draw-downs.

Within the QTR Funds two strategies are housed: Quantitative Tactical Asset Allocation (QTAA) and Quantitative Mean Reversion (QMR). In the following table, QTAA and QMR are briefly described:

Price movement Mean-reversion Trend following
Market dynamic 5 days 3 months
Holding period ~16 hours 1 month
Trading frequency Daily Monthly
Financial instrument Index-futures Exchange Traded Funds
Short positions? Yes No
Leverage? Yes No

The Fund operates systematically. That is, the trading systems generate order-tickets which are executed. There are no discretionary decisions in the trading procedures.

EH: Keeping in mind the current market scenario of rallying markets globally, how has your fund captured the gains on offer over the last two quarters?

The nature of the fund is such that the fund is uncorrelated with the market. In the first quarter of 2013 the fund showed positive returns. However the second quarter of 2013 was lacking behind just as ours peers in the BTOP50.

EH: Your fund delivered excellent returns of nearly 38% in 2008 – how was your fund positioned at the time and what was your most profitable theme during the year? Did your models identify any specific weaknesses across the different asset classes and sectors in global markets?

In 2008 the QTR fund had a strong focus on index futures. The markets were very volatile and strongly mean reverting which was favorable for the mean reversion strategy.

EH: Since 2008 the performance of your fund has been less spectacular – with negative returns in 2009 and 2011. Does your returns profile imply a contrarian strategy or have you adjusted your strategy in the wake of the financial crisis?

The returns of the fund have been less spectacular, yet we do not believe that there is 'one' superior trading strategy that works under all market conditions. We strongly believe in the continuous improvement philosophy. As a result new strategies are developed and added to the QTR Fund. However, there always will be a periods of stronger and weaker performance.

EH: Tell us about your risk management practices - how do you identify and manage the different types of risk? Have your risk management practices changed over the last few years?

Risk management is an intrinsic part of designing trading systems. For the QTR Fund we distinguish the following risks:

  1. Strategy risk: is the strategy still profitable? There is always a risk that a strategy loses its edge. Therefore the applied trading strategies are closely monitored, and adjusted if necessary. By diversifying between different strategies this risk may be reduced.
  2. Market risk; the exposure to the market is a risk by definition. Therefore we strive to reduce the overall market exposure and increase diversification.
  3. Currency risk; the fund hedges the currency risks.
  4. Operational risk; the aim is operational excellence and risk mitigation in terms of trading, operations, software and compliance.

EH: Can you provide an overview of the fund’s structure and management personnel?

The QTR Fund is not a legal entity but a contractual arrangement between the fund manager, the custodian and the participants, governed by Dutch law. The QTR Fund is governed by the Dutch act on Financial Supervision and other regulations and is subject to external audit. The QTR Fund is not supervised by the Authority for the Financial Markets (AFM) as it is exempt from a licensing requirement under the Dutch act on Financial Supervision. The fund does make use though of several guarantees to ensure the position of an investor.

Firstly, there is an independent custodian, managing cash flows from and to the fund and monitoring the activities of QTR Invest. An investor wires money to the fund account, which is held in the name of the fund. This account can only be accessed by the custodian. By contractual agreement QTR Invest has a power of attorney to perform certain actions with the money in this account, in this case buying or selling equity index derivatives. This way QTR Invest is prevented from performing any illegitimate activities with investors' money.

Secondly, the administrator, Confidon, calculates the monthly net asset value of the fund. This way the value of a share is determined independently of QTR Invest.

Thirdly, BDO performs an audit of the financial figures of the fund and QTR Invest. Audited figures can be obtained from QTR Invest, free of cost

EH: What kind of investors are your fund targeted at? Can you give a broad breakdown of your current investor base by type and geography? (e.g. 40% institutions, 40% HNW investors, 20% retail investors)?

In general the fund is open to any investor with a starting of 100,000 euros. Most of the fund investors are Dutch high net worth individuals.

EH: Do you expect your performance or investment style to change going forward? Could you tell us what market opportunities you are looking at right now?

As stated earlier, we strongly believe in continuous improvement and new strategies will be implemented in the future. We are always exploring for new opportunities. Yet the transition from trading opportunity to an implemented trading system may take some time.

EH: What is your near and medium term outlook of the markets, and different asset classes that you invest in? Are there any particularly exciting investment themes that would like to share?

The QTR Fund is a systematic traded fund; consequently we don't have an opinion about the market. What we can say though is that our systems are reducing market exposure, avoiding bonds and taking positions in stocks at this time.

Contact Details
Eric van Sprang and Menno Dreischor
QTR Invest
+31 204656406