Interview
with Willy Ballmann and Dr Tan Lien Seng,
Portfolio Managers of SHK Quant Asia Fund
Eurekahedge
November 2005
SHK Fund Management Ltd (SHKFM) manages
the SHK Quant Asia Fund, a quantitative
and market neutral pan-Asia equity long/short
fund, with a scalable system-driven investment
process. SHKFM is a subsidiary of Hong Kong
Stock Exchange-listed Sun Hung Kai &
Co Limited, a leading financial services
and investment holding company in the Greater
China region.
The SHK Quant Asia Fund was launched in
June 2005 and is managed by Willy Ballmann
and Tan Lien Seng. Willy spent eight years
at the Government of Singapore Investment
Corp (GIC), where he was a portfolio manager
in the quantitative investment unit. Lien
Seng worked for eight years at UBS, where
he was an executive director in equity derivatives
trading.
From a review of the fund's performance
in the first four months since its inception
in June, the fund has had two down months.
How has it fared with respect to the return
and volatility targets set out in your
investment objectives? Is there a benchmark
that you normally compare your returns
against?
We have only been running for four
months now, so it is still early days.
As of end of September, we are up 2.73%
or 8.42% in annualised terms. We are
a taking a slow and steady approach
to managing the fund and have slowly
been increasing our risk capital progressively.
The only true benchmark for a market/country
neutral long-short fund is cash.
Does the fact that you follow a
quantitative bottom-up investment approach
(rather than a fundamental top-down
approach, or a mixed one) have any effect
on the performance pattern referred
to above?
First off, all of the above-mentioned
investment methods have merits. We prefer
the quantitative bottom-up approach
because it allows us to scan the entire
investment universe of liquid Asian
stocks (about 1,200+) for the best possible
implementation of our factor scoring.
At the same time we do get a lot of
diversification out of holding a wide
variety of names (refer to http://www.eurekahedge.com/news/05_sep_SHK_Quantitative_Investing.asp
for our article on the rationale of
quant investing). Our portfolio currently
carries more than 200 different stocks
across our five core countries –
Japan, Australia, Hong Kong/China, Korea
and Taiwan. What drives our investment
process is the "law of active management",
which in simple terms means once you
identify an edge, you want to apply
this over a large number of independent
investment decisions.
It says in your investment mandate
that your style is market neutral and
country neutral, but not sector neutral,
and that you consider the latter a source
of alpha. Could you elaborate?
Our fund is market and country neutral
because we do not believe that our type
of quantitative analysis in its current
form is suitable for making market-timing
or top-down country allocation bets.
However, we do find that the model does
a pretty good job without imposing sector
constraints, which in many cases are
ambiguous and inappropriate anyways.
The output of the model implies a sector
exposure based on the initial bottom-up
quantitative factor scoring. So far
this sector exposure has benefited from
longer-term sector trends, eg, more
recently the boom in energy and basic
material companies. However, for risk
management purposes we do limit ourselves
to a net sector exposure of at most
15% per GICS sector.
How well do your active trading
strategies complement each other? Are
there any diversification benefits to
be reaped?
Our two core strategies are a multi-factor
model and a mean-reversion model. The
former looks at quarterly fundamental
data and longer-term price actions,
searching for factor trends that will
last months, if not years. A typical
position stays in the portfolio for
several months. The latter is much more
short term and purely based on daily
price action data, searching for mean
reversion between related companies.
A typical position stays in the portfolio
for days or at most a few weeks. Clearly,
the two strategies are complementary
in their approach, which brings a significant
diversification benefit to the table.
It is also stated that your relative
value strategy is focused primarily
on Japan. Would this not affect the
country-neutral aspect of your investment
objectives?
No. Country risk is better measured
by net country exposure rather than
gross country exposure. Our net country
exposure is virtually flat at all times.
In terms of gross exposure, a significant
portion of the portfolio will always
be invested in Japan since it constitutes
60% of our investment universe. As for
our relative value trading strategy,
access to cheap borrows, very low transaction
cost, absence of stamp duties or other
taxes and electronic trading capabilities
(DMA) of the underlying markets are
keys to success. Currently these conditions
are only met in Japan and Australia.
We are planning to extend our activities
for this strategy to Australia soon.
Your long/short basket of equally-weighted
investments is described as being generated
from a multi-factor model, with monthly
rebalancing. Does a shorter rebalancing
period mean higher returns (because
of closer tracking of trends)? If yes,
are there other costs that prevent the
choice of the latter?
The multi-factor model mostly takes
in "slow" data, eg, quarterly
earnings. In fact the only type of "fast"
data that goes into the model is price
action. Clearly intra-month returns
are therefore not driven by the factor
returns that we analyse. A one-month
rebalancing cycle is adaptive enough
without being overly reactive to short-term
noise. A shorter rebalancing cycle would
incur substantially higher transaction
cost without necessarily producing any
statistically significant alpha. Having
said that, as part of our ongoing research,
we do look into market-timing models.
How large is your fund now and what
is the % distribution among the various
investment strategies? Are there other
funds in your portfolio?
Our fund was seeded with US$10 million
by Sun Hung Kai. The distribution to
the two core strategies depends on the
market opportunities. Currently around
80% is invested in the multi-factor
model and the balance to pair trading.
It is stated in your investment
mandate that your portfolio comprises
equally-weighted positions and that
you do not unnecessarily optimise. Could
you elaborate on the same? Could optimisation
have a negative effect on returns?
Optimisation does not have a negative
effect per se but there is a
thin line between getting a real improvement
of your investment process and data
mining. Without strong evidence that
optimisation can help us produce truly
superior risk-adjusted returns, we prefer
to use equal weighting as a basic principle.
It produces the most stable out of sample
results and avoids concentration of
event risk.
A look at the numbers in the Eurekahedge
Asian hedge fund database shows that
there are about 500 funds in the relative
value and long/short space, and over
60 of them are located in Hong Kong.
Who do you perceive as your main competitors?
What gives you an edge over them in
the strategies, countries and markets
you invest in?
There are very few pan-Asian, market-neutral
quant funds around. At this point in
time we believe we are a niche player
rather than part of a big crowd. Market
neutral strategies extract "pure
alpha" from the markets, and offers
a fund of funds manager diversification
away the from the more volatile long/short
universe.
Without comparing ourselves too much
with others, we bring extensive actual
Asian trading experience together with
many years of quant research background.
We are also making efficient use of
new programming and trading technology,
eg, contingent pairs trading algorithms,
direct market access, etc. As far as
we can tell, not too many managers in
Asia make full use of new execution
technologies.
What is your outlook on the Asian
markets and their impact on hedge fund
performance, for the rest of the year?
As a quantitative manager we do not
have a subjective view on the markets.
What matters most to us are factor trends
and more generally our investment universe
returns dispersion. The more there is
of either, the better it is for our
strategies!
