GaveKal Investments was founded in 2012 in Luxembourg and is fully owned by GaveKal Capital Limited, the investment management arm of the GaveKal Group.
GaveKal is known as one of the world’s leading independent providers of global investment research. Founded in 2001 by Charles Gave, Anatole Kaletsky and Louis-Vincent Gave, it counts today eight partners and 45 employees with offices in Hong Kong, China, Europe and the US.
- GaveKal Dynamic Futures Fund has had an outstanding track record, being a winner of the Best Emerging Systematic Macro & CTA Fund of 2013 (Investors’ Choice Awards). How did you manage to attain such a distinction and what kind of strategy do you employ in trading futures?
Winning the Best Emerging Systematic Macro & CTA Fund of 2013 was a nice surprise and a confirmation that the fund had a fantastic start. But at the end of the day, it is just a first step. The ultimate prize worth winning is the award for the best systematic CTA on a 5-year basis.
In 2013, the fund managed to deliver a great performance thanks to its dynamic and enhanced Trend Following System (TFS), which has notably a dynamic investment horizon (from medium to short term) as well as a proprietary reversal component to time the change of the trend and shift the fund’s exposure very rapidly.
- Incepted in February 2013, your fund entered the market at a time when CTA/managed futures strategies were increasingly being criticised for delivering lacklustre returns over the preceding three years. How confident were you when launching the fund and did you face any difficulty when raising capital from investors who were sceptical about ‘another trend following fund’?
When one launches a fund in a mature market like the CTA market, one must offer competitive advantages to investors in order to rapidly differentiate itself from the long existing players.
Firstly, we tried to bring a fresh approach to our process. Trends continue to exist but their consistency and their persistency is less intense; periods between trending markets are longer than usual. The process needs to be more dynamic. Additionally, a classic TFS is not sufficient to deliver consistent and superior performances. That is why our fund is also equipped to deal with two environments very difficult for a TFS: reversals and trading ranges. The proprietary components we use to handle those environments are very innovative and offer additional returns while limiting drawdowns in tougher periods.
Secondly, in terms of structure, the 0% management fee/20% performance fee is a clear attraction for investors. All interests are fully aligned. We make money if investors make money and they only pay us for the value we deliver.
- Could you shed some light on your background and experience? What is the reason behind specialising exclusively on equity market indices?
I started to be involved in the market while I was still a student trading US stocks after school, and since then I never stopped! Logically, I started my professional life as a buy side equity analyst and discovered I was more attracted and convinced by market analysis than by fundamental – I had found my style of investing. A merger led me to join the asset allocation team for an European asset manager as a market strategist; I was in charge of spotting corrections and rebounds. I then moved to another large asset manager where I eventually became Head of Asset Allocation and Fund Manager for the diversified funds of the company. At that time I directly managed funds up to €6 billion. My objective was clear: generate excess return on a consistent basis. In order to achieve this, I was focusing on over/under-weighting the equity exposure … in other words buying or selling equity index futures above a benchmark.
I left at the end of 2011 to embark for this great adventure of launching a systematic CTA Fund: the GaveKal Dynamic Futures Fund. I am actually doing the same job as before: buying/selling equity index futures. But this time, there is no benchmark and I can implement my strategy on a full scale. Why only equity market indices? I have been studying equity markets for more than 14 years now, so that is my expertise. Additionally, equity markets provide plentiful and reliable data in so many disciplines. For instance, you can find indicators in different areas: oscillators, breadth, sentiment, and accumulation/distribution. You can use various money management or position sizing techniques. It is a never ending story.
On top of that, I like ‘pure products’. Investors know in what they invest. We are quite transparent. Hence investors also know frequently what our exposure is. Investors can use our fund in 3 different ways:
- As an absolute return fund. They invest to get our aggressive target in terms of annualised net return of 25%.
- As a hedge against falling markets. The fund will deliver outstanding performance in times of bear markets.
- As a tactical overlay above their equity pocket. The fund adjusts their equity exposure without their intervention.
- As an absolute return fund. They invest to get our aggressive target in terms of annualised net return of 25%.
- Your fund prides itself on being less correlated from its peers, gaining 24.74% in 2013 when the Eurekahedge CTA/Managed Futures Hedge Fund Index was down 0.23%. How did you managed to achieve this feat at a time when a majority of your peers were blaming active central bank intervention in the markets for their depressed returns?
As other CTAs the Fund benefited from the trending equity markets in 2013, but we made the difference on corrections by going short or neutral. Two instances: firstly in late May 2013 when the model accurately identified the upcoming correction and went short in a timely manner. Secondly in August when following the same discipline the model adopted a neutral exposure and avoided the selloff.
Active central bank intervention disturbed the market. But markets are all about distortions right? The Asian crisis, LTCM, the bursting of the IT bubble, the subprime crisis, the European sovereign crisis – all those events disturb market action. One trend has clearly stopped: the fall of yields which helped some CTAs to deliver consistent performance in the past. Is this one explanation behind the lacklustre performance of some CTAs? Probably, but there are others and active central bank intervention is also just one of them.
- Could you share with us the respective roles manager discretion and quantitative models play in your investment process? How do you strike a balance between following a disciplined investment strategy and adapting to changing market conditions?
The balance is easy to strike: manager discretion plays no role; every signal given by the model is implemented with rigor. The fund is 100% systematic.
The model has been built to provide consistency in terms of return. As a result the model is equipped to adapt to changing market conditions. The fund will deal with three types of markets. Firstly, bull markets during which the fund should deliver between 20% and 30% net return. Secondly, trading ranges or trendless markets. In this type of environment, the fund should deliver positive performance at around 10%. Finally, bear markets. This is where the fund should deliver the strongest performances (above 30%).
- Can you tell us more about your asset allocation strategy? How would you rate the effectiveness of diversifying across different geographic market indices, given that equity indices are highly correlated and tend to move together as a whole?
Per se, diversification is not an objective. Our goal is to offer a very attractive risk return profile to investors. Hence, we will look for high returns but with contained drawdowns. That’s where the geographic composition comes into play. Some indices are selected for their high propensity to deliver strong returns while others are selected because they moderate the drawdown of the fund in tough times.
- An interesting aspect about your fund is it charges only performance fees, without any management fees. How does that help to further align managers’ interest with investors? While returns so far have usually been positive, how would you meet your financial obligations if performance were to run into difficult times?
We earn money only when investors earn money, therefore all interests are aligned. Should the fund fail to generate fees, GaveKal Investments would be fully supported by the GaveKal Group, a solid and well-diversified company. The business model prevents any failure to meet financial obligations.
- Can you share with our readers your main principles for risk management? How do you go about identifying risks ahead of time and reducing potential losses in the strategy?
The fund is UCITS-compliant, thus specific rules in terms of risk management have to be respected. Namely (but not exclusively): VaR limit, counter-party risk, maximum gross exposure, etc. In order to be fully transparent, we decided to outsource the risk management to an independent external service provider which has its own access to our prime broker and to our fund accountant.
Of course, we also have our first level internal risk management pre- and post-trade.
- According to our estimates, CTA/managed futures funds have been witnessing a wave of investor redemptions over the past 15 months. On the other hand, GaveKal Dynamic Futures Fund has grown to US$117 million today after starting with just US$6 million in 2013. How has your fund managed to keep attracting assets all this while?
One word: Performance. Having a nice back testing is one thing but delivering performance in line with it is the key. Fund AUM took off after the summer of 2013 when the Fund managed to hold during the two corrections. Additionally the fees structure (0/20), the UCITS regime and our availability for meeting investors helped in raising assets. But let’s face it, for now we are still an emerging player. Now begins the second phase of our development: attracting major institutional investors. This will take time but we have some. This will need upgrades to our structure and we are already implementing them, but mainly this will need the delivery of what we offer: consistent and superior performances.
- October was a roller coaster ride for global equity markets, with the S&P 500 Index seeing some of the largest weekly gains and losses. What stage of the bull market cycle do you believe we are at? Do you think a systematic approach would continue to generate profits as the market becomes increasingly volatile?
The sharp correction that occurred during the first two weeks of October changed the game. In fact since June 2013 corrections were shallow and volatility disappeared. What happened in the first two weeks of October was a surprise for most investors. Like in all periods of investors’ resilience, they were used to buy equities as soon as there was a correction of 2% to 3%. Well, they may think twice before doing this again when the next correction arises. This means that larger corrections and higher volatility should be on the menu. I think it is great! The fund likes volatility. A well-equipped process like ours should significantly benefit from this. Our dynamic approach and our proprietary components will allow the fund to handle what markets will offer in terms of behaviour. I am very confident that our fund will differentiate itself further from the competition and fulfil investors’ needs.
GaveKal Dynamic Futures Fund
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