with Marc H. Malek, Managing Partner at Conquest
The Conquest Managed Futures Select (MFS),
along with other domestic and offshore funds,
is managed by Conquest Capital LLC, a Commodity
Trading Advisor (CTA) specialising in the
trading of futures and FX markets globally.
Conquest Capital LLC is a wholly owned subsidiary
of the Conquest Capital Group, which also
manages a multi-manager portfolio through
another subsidiary Condor Capital
LLC. The management firm handles an asset
base of about US$382 million, and has ten
employees including five investment professionals.
Marc H. Malek has 13 years' experience
in managing currency-based investment products,
spanning various roles in analysis, trading
system design, trading and fund management.
These included senior level stints at UBS,
first as the worldwide head of the exotic
FX derivatives group, and later as the executive
director in charge of FX proprietary trading
in Europe. He is an engineer by training,
with a BS in engineering and applied science
from California Institute of Technology.
How does the MFS fund fit in with
the rest of Conquest Capital Group's portfolio?
What portion of the firm's assets is in
privately managed accounts?
Conquest MFS is an exotic beta product
for investors looking to efficiently
and cost-effectively replicate the returns
of the managed futures space. Most of
the managed futures space delivers exotic
beta, which can be simply and systematically
replicated, not alpha. The one part
of the managed futures space which provides
the opportunity to deliver alpha is
the short-term segment. Conquest Macro
is an alpha product for investors seeking
an exposure to short-term market movements.
Both Conquest Macro and Conquest MFS
trade futures and forwards and are technically
based. Conquest FX Carry is a fundamentally-driven
alpha programme which trades pairs of
currencies, to capture carry during
risk seeking environments and preserve
capital during risk-averse environments.
Through Conquest Volatility Relative
Value (VRV), we provide a highly specialised
alpha product seeking to arbitrage volatility
mispricings across fixed income, foreign
exchange, commodity and equity markets.
Conquest VRV can be long, short or neutral
About 15.5% of the firms' assets are
held in privately managed accounts.
Could you outline the fee structure,
sources of capital and other key features
of the fund?
Given our belief that CTAs provide exotic
beta rather than alpha, we wanted to
reflect that in the pricing for Conquest
MFS. Conquest MFS is available to investors
with a flat 1% management fee and zero
incentive fees. The biggest selling
point of Conquest MFS is its simplicity.
It has about 90% correlation to the
S&P Managed Futures Index, charges
a fraction of the fees other CTAs charge,
and unlike other CTAs who are "black
boxes", Conquest MFS is open code.
The fund was initially seeded by the
endowment of a very large Ivy League
university who worked with us on the
design of the programme. Subsequently,
another major university endowment has
invested as well as a pension plan and
one of the top ten funds of funds by
What is the rationale behind
your fee structure? Does the structure
provide a competitive advantage when
As mentioned earlier, we believe that
some hedge fund strategies are alpha
strategies, and some are exotic beta
strategies. Neither class of strategies
is necessarily superior; the classification
just conveys the methodology used to
extract those returns. If you can create
a relatively simple, systematic strategy
that replicates the returns of a hedge
fund strategy, the hedge fund strategy
is an exotic beta strategy. The more
faithfully your simple systematic strategy
replicates the hedge fund strategy,
the more the hedge fund strategy is
delivering exotic beta, instead of alpha.
Generally speaking, one good way to
determine whether a hedge fund strategy
has a large beta component is to look
at correlation of funds in a strategy
to each other. If this is relatively
high, it indicates the existence of
a systematic or beta factor to which
they are all subject.
We believe the pricing of systematic
exotic beta should be much lower than
alpha strategies, and to that extent,
we chose the reduced fee structure for
I think the fee structure gives us
a tremendous competitive advantage since
we are giving back to the investor a
significant portion of the fees that
other CTAs would charge. For a gross
return of 20% per year, MFS would return
19% to the investor, whereas a typical
2/20 CTA would return about 14.5%.
How would you describe MFS' investment
methodology? How does the fund manage
Conquest MFS uses 20 different time
frames to trade 55 different markets
spanning currencies, fixed income, equities
and commodities. The investment methodology
is systematic and non-optimised.
Risk is managed via diversification
over market and time frame and by sizing
of positions which is based on recent
In your investment mandate, you
detail a study that provides access
to managed futures as an asset class,
as also uncovers their long-term trending
characteristics or 'beta'. Could you
give us a brief overview of this study
and the key findings?
In our study, we found that most CTAs
exhibit a very high correlation (70-90%)
to one or more simple breakout strategies
consisting of trading a diversified
group of markets by buying at the nth
day high and selling at the nth day
low. We chose 33 different breakout
lengths, ranging from 1 to 200 days.
Each of these breakout lengths was run
as an "nth day" simple breakout
strategy on Conquest MFS' 55 markets.
The result is a historical track record
for each of the breakout lengths. Our
study plots the correlation between
a CTA's monthly return stream and the
return stream of each of the breakout
lengths. We have found that most of
the CTAs we tested have a very high
correlation to breakout lengths between
30 and 60 days.
This means that what most CTAs are
delivering is in part a beta; an exotic
beta, but not alpha. Further studies
showed that CTAs were not generally
delivering alpha in excess of the exotic
beta. In other words, CTAs as a group
were not outperforming the exotic beta
they delivered. For an investor, therefore,
investing in the exotic beta directly
would generally be a better strategy
than investing in a portfolio of CTAs
that would purport to deliver alpha.
By contrast, are the CTA funds
that were shown in the study to be highly
correlated (either negatively or positively)
to short-dated breakout benchmarks,
a good indicator of the 'alpha' potential
of the managed futures space?
Our analysis of various trend followers
and CTAs indicates that the only opportunity
for alpha in the space exists in the
very short-term trading strategies.
Because there is a small sample of trades
in the medium- and long-term trend following
time frames, managers really "have"
to take every trade that looks like
a trend, and are typically in the trade
for over ten weeks. In contrast, short-term
traders choose from thousands of trades,
and typically stay in these positions
for days not weeks. This diversity of
options creates many more opportunities
for short-term traders to generate alpha,
which is reflected in the lack of correlation
amongst the short-term traders. We had
believed this intuitively for some time,
which is why our Conquest Macro product
focuses on the short-term space. We
were gratified to see this intuitive
view supported by the data.
Among the asset classes that
MFS trades in, the biggest allocations
are to fixed income (30%) and foreign
exchange (27%). Would you say this is
a reflection of your fund's competencies,
or the depth of these asset class markets?
In designing Conquest MFS, we sought
to replicate the CTA industry in one
fund. To determine the asset class mix
for the fund, we did a survey of the
largest 20 CTAs, and used an average
of their sector allocations and most
commonly used markets. Although most
CTAs say they trade over 50 or 100 markets,
a closer study of P&L attribution
reveals that most of the P&L is
generated in the largest, most liquid
markets such as currencies, fixed income
and equities. The concentration of P&L
into these three sectors is a reflection
of the depth of these markets; a CTA
over US$500 million can easily trade
these markets without having any effect
on them, which is something that cannot
necessarily be said about a market like
live cattle or orange juice. Our allocation
is thus a reflection of the allocation
of the industry as a whole, which in
turn reflects the depth of markets in
these asset classes.
MFS is also diversified across
time frames and geographic regions.
What is the breakdown of the fund's
assets by these two criteria? Why?
Conquest MFS separates time frames
into three different buckets:
Breakouts less than 20 days (short-term)
Breakouts greater than 20 days and
less than 60 days (medium-term) -
Breakouts greater than 60 days (long-term)
However, due to liquidity constraints,
Conquest MFS does not trade some commodity
and currency markets over the shorter
half of the strategy horizons. Consequently,
the true breakdown across time frames
is: 34.2% short-term, 25.7% medium-term
and 40.1% long-term.
Conquest MFS separates its geographical
exposure into three different buckets:
Asia/Australia - 20.5%
Europe - 34.8%
North America - 44.7%
The different time frames were chosen
to provide maximum diversification across
trading horizons. The time horizons
were spaced logarithmically because
the marginal effect of each additional
day in the breakout calculation decreases
as the time horizon increases. In other
words, the difference between a 5-day
breakout strategies trades and those
of a 10-day strategy is going to be
significantly larger than the difference
between the trades of 160-day and 165-day
The geographical exposure was weighted
for liquidity and time-zone diversification.
We chose markets that were most representative
of what other managers trade while attempting
to preserve diversification both across
regions and within each region.
The investment style of managed
futures managers is quantitative and
systematic, and, by extension, replicable.
Would this imply that there is a certain
broad investment methodology that most
of these managers gravitate towards?
How then, does any player in this space
differentiate itself? And more specifically,
how does MFS differentiate itself?
This is precisely the point of MFS.
When you are a trend- follower, especially
a long-term one, an overwhelming percentage
of your annual P&L is generated
by a few trades. As such, a trend-follower
cannot afford to "miss" any
of these trades. They all have to get
into a trade if it looks like a trend,
and reverse when the market reverses.
They try to differentiate themselves
on the periphery by tweaking the models,
but the net effect of these adjustments
is negligible, as evidenced by the high
correlation they all seem to have to
MFS recognises that this is a systematic
exotic beta strategy, and through its
flat 1% management fee improves the
risk-adjusted return tremendously.
Another key aspect of MFS is that the
investor is getting under "one
roof" all of the time frames from
five days to 200 days. CTA investors
recognise the importance of diversifying
their time frames and allocate to long
term-trend followers and short-term
traders, hoping to hedge some of the
reversal risk inherent in trend-following.
Unfortunately, however, the long-term
manager can be trading a totally different
allocation than the short-term traders,
causing a total risk mismatch. In MFS,
with the exception of some of the less
liquid markets that are not traded in
the very short-term models, all models
trade all markets in the same proportions.
This consistency of allocation significantly
enhances the stability of the returns.
And lastly, what is your near-term
outlook on opportunities in the CTA/managed
I think the outlook for managed futures
is very bright in the medium to long
term. This is a very cyclical strategy,
and unfortunately most investors get
in after CTAs have made their 30-40%,
and get out after they lost the 10-20%.
I think the time to invest in CTAs is
now, when we are at the bottom of the
12-month rolling return charts.
Another very compelling reason is that
CTAs usually tend to do very well in risk-averse
regimes whereas other hedge fund strategies
tend to suffer. For a variety of reasons,
we believe that we are entering a risk-averse
regime after the longest period in risk
seeking since 1997. As a matter of fact,
we have written a paper on the topic which
can be viewed on www.conquestcg.com.