Magma Fund Advisors Ltd was formed in 2007 to set up a series of funds using a set of unique tools that predict market trends on all time scales to a remarkable accuracy. The firm was established by Rich Clifford and a few associates in the US and Switzerland. Rich, the fund manager, has worked with the predictive models for six years while developing the trading strategy and risk profile used by the Vesuvius Investment Fund and other Magma funds.
In the four months since inception, the Vesuvius Investment Fund has outpaced the S&P 500 by 43.65% (30.18% positive gain) while using only 10% of the portfolio to trade (holding 90% in cash money-market positions) and placing only four directional trades; all while risking no more than 1.6% of the fund’s principal.
Could you tell us the region(s) that you allocate the investments of your fund to? On what basis (and to what extent) do you diversify your portfolio across different regions?
The Vesuvius Investment Fund does not diversity across different regions. The fund’s focus is on trading the S&P 500. However, Magma Fund Advisors will launch similarly traded funds on different indexes in different regions in the near future.
You invest 10% of your gross assets into S&P 500 futures contract. What other instruments/asset classes, and using which strategies, do you invest the rest of the 90% of your gross assets in?
Quite simply, the 90% of the fund not allocated towards margin for the S&P futures contract is invested in a cash money-market position based on the overnight Fed funds rate. We chose 10% for this fund, though we will have other higher risk funds using 15% and 20% in the future. Risk and returns will go up accordingly.
With the number of hedge funds increasing at a rapid pace, managers can’t help but face stiff competition from their peers. What competitive advantage do you offer your investors?
The Vesuvius Investment Fund offers investors superior returns with managed risk. Our simplified trading strategy, our unemotional approach and our discipline to follow the plan Magma has set out for this fund gives us a competitive advantage few others could offer. Taking the emotion out of trading while limiting the risk of each trade is rarely seen. Someone used to tell me, “have a plan and stick to your plan.” That’s exactly what we do.
How much of your pre-investment research do you bank on your electronic models for? Did the recent market turbulence adversely impact the functioning of your models? More importantly, did it require you to personally intervene in the model-driven research and investment process?
Our models predict market trends over a designated period of time. The Vesuvius Investment Fund focuses on what we call the “Monthly Trends” (those lasting two to four months in duration). We rely on the model for guidance related to entry and exit points; however, the trading strategy is what works us into those positions while protecting our position until the market has successfully moved away from our entry point.
Market turbulence or the lack thereof, has no effect on the model. We predicted a month in advance of our 28 December sell, and will know a month in advance of our next short-term buy. Personal intervention in either the model or the trading strategy is not something we employ. We have a plan with acceptable risk and we stick to it.
Do you rely on leverage to enhance the returns of your fund? If so, to what extent? What is the usual ratio of long to short positions that you maintain?
The Vesuvius Investment Fund does not borrow money to enhance the returns; however there is some leverage associated with trading futures contracts. Since inception, and through prior testing, the fund stays very close to a 1.7:1 leverage. Much of this is dependent upon current margin requirements and current market levels. If margin goes up, our leverage goes down. Our 10% allocation, however, does not change.
The Vesuvius Investment Fund returned an impressive 30.2% over the last four months (ended February 2008) as compared to a decline of -1.9% in the Eurekahedge Hedge Fund Index over the same period. What factors would you attribute this extraordinary outperformance to?
The model we use to predict market trends is very accurate. Combined with this, is a unique trading strategy whereby the fund will hold futures positions for the duration of these trends, rather than buying and selling based on market emotion, technical indicators, bail-outs, buyouts or any other kind of short-term influence.
Could you tell us a little about how you manage risks for your fund’s investments?
Buy- or sell-stops are placed above or below the fund’s entry positions on all futures contracts, allowing the markets to move freely during a trend while limiting our risk on each trade and avoiding whipsaws. The last trade placed on 28 December (a sell), has a buy-stop 1.5% above our entry point; a level the S&P 500 has not seen since.
Being a relatively new fund, what kind of investors does the Vesuvius Investment Fund’s investor-base comprise of? What classes of investors is your fund ideally suited for?
Initially, the fund is seeking individual investors and seed capital, with institutional marketing coming later in 2008 or early 2009. The fund is suited for all kinds of investors who meet the minimum requirements.
What’s your take on the present state of the global economy? Could you share with us your medium-term outlook of the equity markets?
The present state of the global economy is obviously a troubled one. Magma sees an end to this monthly downtrend the S&P has been experiencing since 28 December 2007 within the next few weeks. The market should then go through a very short-term bear market rally before rolling over again with some more selling throughout the summer.