The Billion Dollar Interview with Will Andrews, CEO at Campbell & Company
Founded in 1972, Campbell & Company specialises in systematic managed futures and equity market neutral strategies, including a diversified blend of trend following, systematic global macro and short-term tactical trading. The firm manages approximately US$3.1 billion across global financial, commodity and equity markets for institutional and private clients worldwide.
Campbell’s flagship Managed Futures Program began trading in January 1988, and has an annualised return of 12.7% since inception. Currently, there is US$2.6 billion invested in the strategy.
Eurekahedge: Keeping in mind the recent market scenario, with rallying markets globally, how have your funds fared over the last six months? To what extent have you profited from the bull market run?
The last 6 months (through June 2013) have been quite good for our Managed Futures Program, which has returned +11.0% (net of fees) during the period. While the recent bull market in equities has been a generally positive environment for the strategy, it is important to note that we trade interest rates, commodities and foreign exchange as well as equity index futures. The equity sector has been profitable, as the program was positioned net long the sector for the duration of the rally. So far this year, the sector with the biggest impact on our P&L is commodities, which has profited from the significant decline in precious and industrial metals.
EH: The Campbell Managed Futures Program posted excellent returns in 2008, outperforming the broader hedge fund industry as well as the underlying markets. What were the winning themes that enabled this performance?
As a fund that can go long or short in more than 80 markets spanning all four sectors, we are able to profit regardless of the direction of any underlying market. This is an important advantage of our strategy, particularly when compared to traditional stock/bond portfolios and long/short equity hedge funds. Our strategy type is known as Managed Futures, and the various funds that employ this strategy type are known as CTAs (Commodity Trading Advisors). The name is really a misnomer, a legacy from the early days in the 1970s when commodity futures were the only instruments available to trade. These days, most CTAs trade all asset classes.
In many of the most difficult years for traditional investment portfolios, CTAs have done well. In 2008, for example, most CTA benchmark indices posted gains, while nearly every other alternative investment strategy was down. When markets are trending in either direction, CTAs can profit by taking positions in the direction of the trend. During the financial crisis, this entailed getting short equities, long USD and long fixed income in late 2008/early 2009.
There have been six down years for the S&P 500 Index since the inception of Campbell Managed Futures in 1988, and the program has been profitable in five of them.
EH: Your performance in 2007 and 2009 was negative, while most other hedge funds (and underlying markets) delivered strong returns during these years – does this suggest a bias towards contrarian strategies?
In 2009, hedge funds were profitable but CTAs had a difficult year. CTA performance tends to be largely uncorrelated to hedge funds, not negatively correlated as a purely contrarian strategy would be. This is one reason why the strategy can be a valuable component of a diversified portfolio. The strategy may have been down in 2009 when equities and hedge fund portfolios posted gains, but it was up in 2008 when equities and hedge funds dropped significantly.
CTAs lost money in 2009 because of their tendency to follow market trends – not because of contrarian tendencies. In the first half of 2009, there were sharp trend reversals in nearly every market and sector as the recovery took hold. This is typically the most difficult environment for the trend following strategies employed by most CTAs. Because Campbell Managed Futures uses a diversified approach, with both trend following and non-trend based strategies, the program was able to outperform the broader industry to a certain extent.
In 2007, both trend and non-trend strategies lost money. This was a tough period, but we learned a great deal from the experience and implemented a number of enhancements to the strategy which have served the portfolio very well since that time.
EH: Could you elaborate a bit on your strategy development process? You mentioned that your strategies adapt through macroeconomic change – how have your strategies shifted since the 2008-09 financial crisis?
The research team is constantly developing new and innovative approaches to capture market inefficiencies, so in that sense the portfolio is quite dynamic. Since 2008, we have added several new styles of models to the portfolio, including short-term mean reversion, sector-based and factor-based trend following and enhanced carry.
Our investment process is designed to systematically capture a wide range of market behaviors with a diverse set of quantitative approaches implemented across multiple time horizons. We believe investment opportunities are persistently generated from the transfer of risk between hedgers and speculators in futures markets, temporary inefficiencies resulting from supply/demand imbalances, liquidity needs, and investor biases. These opportunities can be uncovered using hypothesis-driven, scientific research.
New ideas are typically sourced as discoveries through a result of the continual monitoring of existing strategies and through academic study of new statistical and/or econometric relationships within or across instruments and markets. Investment theses are converted into mathematical models that can be tested. Once an investment thesis is developed and thoroughly tested, it undergoes a rigorous peer review process to evaluate strength of theory in terms of the underlying investment thesis, informational content, robustness and persistence. Model assumptions, indicator selection, and other criteria are also analysed, including tail risk and drawdown potential as well as transaction and slippage costs. New ideas must demonstrate efficacy on a standalone basis while complementing the existing portfolio. The Investment Committee determines ultimate model approval and capital allocation.
EH: Which region(s) do you allocate the investments of your fund to? On what basis (and to what extent) do you diversify your portfolio across different regions?
The strategy is active in developed markets in North America, Europe and Asia, along with several emerging economies. Geographic exposure is one of a number of risk dimensions monitored by our risk management process in order to ensure adequate diversification (more on this in question 7). To that end, we are continually seeking to expand our market set and recently began trading several additional emerging currencies, as well as VIX futures.
EH: What is the usual mix of assets held by the fund (i.e. equities, bonds etc.) and are there any pre-specified guidelines determining this? On average, how many positions do you hold at any given point in time? And how often do you rebalance your fund’s portfolio?
The fund is active in equity index futures, commodity futures, interest rate futures and currency futures and forwards. Over long periods of time, we expect a relatively equal contribution to total return from all four sectors; over shorter periods, however, sector exposure can vary significantly based on the opportunity set.
We trade more than 80 markets, and tend to have a position on in every market most of the time. Our positions are adjusted on a daily basis as our systems generate new signals.
EH: Can you tell us about your risk management systems and processes? How is risk across the different strategies managed?
The portfolio systematically targets a stable level of risk (‘vertical’ risk management). Individual model risk targets are calibrated such that the overall portfolio will, on average, achieve its desired risk target. With a simple aggregation of models, though, the actual level of portfolio risk and the effective contribution of the different strategies would vary day-to-day as the model positions interact with each other and with market movements.
In order to maintain the intended diversity in risk composition (‘horizontal’ risk management), the risk management system also monitors and constrains exposure to key risk dimensions. This is, in our view, the most effective way to mitigate tail risk. We seek to construct a balanced portfolio along risk dimensions such as Strategy (momentum, carry, mean reversion, time horizon, etc.), Factor (flight to quality, global bonds, global stocks, commodities, etc.), Market Sector (asset class, geography, liquidity, etc.) and Correlation. Our commitment to diversification among risk dimensions is a key driver of our recent outperformance.
Once the risk composition characteristics are achieved, the risk management system scales the portfolio to achieve the desired target risk level (approximately 4% gross monthly standard deviation).
Like the individual strategies, the portfolio construction and risk management process continues to evolve as it benefits from Campbell’s significant commitment to ongoing research. In our experience, an effective risk management strategy is critical to the successful implementation of a managed futures strategy. With more than 40 years of trading under our belt, we have been able to refine our approach to managing risk to incorporate lessons learned over an enormous range of macro environments. This includes the inflationary period in the late 1970s, the crash in October 1987, the tech bubble in the late 90s, the terrorist attacks in September 2001, the subprime mortgage crisis in 2007 to 2008 and most recently, the zero-interest rate regime engineered by the Fed and other central banks across the globe.
EH: How has the functioning of your fund been effected by the new regulations imposed by governments globally?
We have had to temporarily exclude certain markets from time to time due to shorting restrictions, but because we are active in so many markets, the impact is minimal.
EH: How has fundraising been over the last couple of years? Many managers have found it hard to raise assets in the current environment – has that been your experience too? Which investor class do you see as being more active in allocations recently?
We have been growing for the last year due to both P&L and inflows, though it has been a difficult environment for asset raising. Approximately half of our investors are direct institutional clients while the other half are high net worth. One trend we are seeing is an increase in requests for customised portfolios – for example, a pension fund that wants a low-volatility version of our flagship program, or a sovereign wealth fund that wants a program which excludes specific markets or sectors. Because we offer separately managed accounts, this is an area we are exploring.