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Interview with Richard Bibb, CIO of AIMhedge Establishment

AIMhedge is a managed futures/CTA fund based in Liechtenstein. AIMhedge started out as the semi-automised trading system of Holger Albers in the early 2000s that was fully systematised and started live trading in 2005. AIMhedge has gone on to win Best German Hedge Fund in 2008 and nominated in the top five for ‘The Best Hedge Fund over 3 Years’ by the Hedge Fund Review Magazine.

The growth of the firm has now attracted former employees of Man Group,  including Richard Bibb to the team as CIO. Prior joining AIMhedge, Bibb had spent 12 years as one of the chief system developers at AHL where during his time, the firm’s AuM rose from US$300 million to over US$20 billion.

AIMhedge Global Diversified Fund is a systematic hedge fund focused on delivering absolute returns by investing in financial and commodities futures. The trading algorithm is based on a trend-following strategy with strict risk management rules, implemented on an automated basis. A broad diversification results from trading more than 60 futures markets worldwide. The fund has two currency share classes: US$ and €, with minimum investments of US$100,000 and €100,000, respectively. In addition, AIMhedge also offers managed accounts and structured products.

The one thing that 2009 will be remembered for is the fear and uncertainty that permeated the markets. Nobody knew what was going to happen and many expected the worst. Rating agencies, central banks and politicians alike lacked a clear understanding of the way forward and so the industry went to the ground by putting huge amounts of money into sovereign debt. This withdrawal of liquidity from the futures markets and the increased levels of nervousness caused numerous sharp transitions in the markets and prevented almost all trend followers from making profit. Fortunately, the latter part of 2009 has seen a turnaround in performance and our funds are now in a process of reverting to normal levels of returns. At no point during 2009 have we been operating outside of the statistical norms of our trading model. AIMhedge has shown a remarkable amount of resilience during 2009. We believe that this is due to our trading model’s dynamic risk management and our ability to handle risk in real, monetary-based terms.

We feel that it is important to remember that managed futures investments are not short-term investments. We would normally recommend that clients leave money in a fund for at least three years and, if you average our performance over this three-year period, you will see that the average return is currently running at around 18%. This is our expected long-term return.

In our opinion, the worst is over and the global economy is heading for a slow and possibly painful recovery. Economists are back into charted waters and as such, predictability will return to the markets. We believe that AIMhedge can benefit from this environment as the recovery will lead to clear trends developing. Many of the very large investors are currently sitting on colossal fixed income positions – these investors have an obligation to pursue returns for their clients and as such, they will have to re-enter the markets in 2010. This re-entry will cause trends to form, something we are well-positioned to take advantage of.

AIMhedge is fully diversified, trading nearly 70 futures markets worldwide. We will trade any futures market that has sufficient levels of liquidity for us to do so.

AIMhedge only trades futures and LME forwards markets. These markets have sufficient liquidity for us to grow significantly without endangering our performance. Controlling risk is very important to us and the assets we trade are all exchange traded, minimising counter-party risk.

AIMhedge is a 100% systematic managed futures trader. We believe in a well-researched highly statistical approach to trading. We also believe that simple models are robust models. Complexity tends to indicate a lack of clarity in the thought process and could indicate that the model has been overfitted to the data. Our main fund uses a single model to trade all markets and almost all of the parameters are at the portfolio level.

The main trading system at AIMhedge is fundamentally a medium-term trend-following system. However, we do not operate an “always in” model. Our system examines markets for trends using a combination of trend-following, breakout and what I term a “proprietary third approach” (kept under wraps to protect our IP). Once we have detected a trend, our risk management system calculates a position based on our desired exposure to the market in question. Risk is central to our trading approach and ensuring that no single position exceeds predefined limits is key to doing so. We also examine risks associated with traditional sectors, risks due to short-term market correlations and total portfolio risk. Once we are happy that the desired position is within our risk limits, we make a trade. From then on, the position is managed by our risk management system. All positions have explicit monetary risk levels associated with them; thus, we are not exposing the client to unforeseen VaR-type losses.

AIMhedge generally holds a portfolio of between 30 and 40 markets, although this could increase to just below 70 markets if conditions are right and trends are detected in every market. Our typical holding period is two weeks for a losing trade and two months for a winning trade.

Our trading system implements an active risk management system that, unlike the industry norm of generating VaR-type figures, generates exact, monetary-based risk figures. These figures are available for all of our traded markets, sectors, correlated groups and for the portfolio as a whole. The risk levels are controlled explicitly and are recalculated every time the trading system runs. Our belief is that VaR figures have very little significance in fund management as they do not, in themselves, do anything to control risk. If you are serious about risk, you need to have a system in place that actively controls risk and keeps it within acceptable levels.

Our performance in 2008 shows that our system controlled risk very well during the crisis and does not require redesigning.

We do not expect volatility to head higher in the next 6 to 12 months. We believe that as the world recovers from the downturn of 2008, the fear that has driven the markets over the last year and a half will recede to more normal levels. Along with the reduction in levels of volatility, we feel that volumes will begin to pick up as institutions move away from holding large cash positions. Both of these attributes bode well for our trading approach in 2010. Evidence of this is already coming through in the performance figures we have released during the latter half of last year.  

We do not believe in complex trading algorithms. Good trading ideas are generally fairly easy to explain as they are based on solid, sensible ideas. Our trading approaches lend themselves to being explained fairly easily, although a few aspects of the model are not discussed; we do not want to lose our trading advantage by giving away the finer details of how we trade.

In general, we have found that the risk-handling aspects of our model are very attractive to prospective investors. This may explain why, in what has been a fairly poor year for many funds, we have increased our FuM by over 20%.

Most of our investors are institutional fund of funds and it is this type of investor that has contributed to our growth. With the release of our UCITS III fund in the New Year, we should see inflows from pension funds and high net worth individuals from within Europe. Outside of Europe UCITS III has less relevance, but we expect to see significant inflows as the worldwide economy grows.

Our client base is predominantly institutional (around 80%) including fund of hedge funds, asset managers and private banks. The remaining comes from high net worth individuals. We do not actively target the retail market even though with a UCITS III fund, we could.

  1. In 2008, the AIMHedge global hedge fund posted gains of 41.4% while all markets across the globe were going through drastic downturns. How do you explain this commendable outperformance?

    2008 was in many ways a perfect storm for the finance industry and from the perspective of AIMhedge, it clearly demonstrated the fundamental advantages of systematic managed futures trading. Trading managed futures allowed us to take advantage of a large, diverse set of rising and falling markets. Additionally, because futures are exchange traded, our counter-party risk was kept to a minimum without introducing liquidity issues. During the year, almost all sectors contributed to our performance, with stock indices and industrials putting in very strong returns. For us, one of the key advantages of being 100% systematic is that emotion is taken out of the trading environment. Trading in chaotic times requires good, rational decisions to be made and systematic trading is based on solid research and pure data.

  2. In 2009, your fund’s returns have been in red while the underlying markets, as well as the global hedge funds, have been largely positive. What are some of the possible reasons why the fund underperformed this year?
  3. As a global diversified fund, could you tell us about the regional diversification of your fund’s portfolio?
  4. What are the different asset classes that you allocate to? Do you have any fixed asset allocation ratio or any floor/ceiling in place for your allocations? If so, on what basis do you decide on these?
  5. Tell us about the qualitative and quantitative research that forms part of your investment process. To what extent does your electronic model influence investment decisions? How do you go about choosing between alternative models for different asset classes?
  6. Could you take us through the process of how (and on what basis) the software works out models and trends for your investments?
  7. On average, how many positions do you hold at any given time? What is the typical holding period for a position?
  8. Tell us about the risk management tools and practices that you have in place. Have your risk guidelines changed after the financial crisis?
  9. Given that the fund takes on a trend-following strategy, what is your outlook on the fund’s performance in the next 6 to 12 months? Do you expect market volatility to head higher in future? Why do you say so?
  10. Often, it is difficult to describe complex quant models to investors. Have you found this a hindrance to raising capital? Which types of investors have shown interest in the fund since its launch?
  11. What classes of investors (retail, institutional, HNW individuals, etc) is your investor base currently made up of? Could you give us a rough breakdown of the same? Also, how is this spread geographically?

Contact Details
Richard Bibb
Chief Investment Officer & Partner
AIMhedge Establishment
Industriering 10
FL 9491 Ruggell
Phone: +423 375 77 77