Precise Asia Pacific Fund is managed by Singapore-based Precise Asset Management. The fund adopts a long/short equities strategy driven by a quant investment model and aims to achieve consistent capital appreciation in both positive and negative markets through investing in the most liquid listed securities in Asia, including Japan, Korea, Taiwan, Hong Kong and Australia. The Precise Asia Pacific Fund will be launched in July this year.
- Can you briefly discuss the strategy/investment methodology behind your quantitative investment approach? How does your approach differ from other black boxes on the market?
Investment activities of the Precise Asia Pacific Fund are governed by the Precise Analysis Model, which is a structured, unbiased, quantitative approach to equity markets. The unique feature of the Precise Model is its multi-layered approach. By analysing and evaluating the dynamic relationships between individual equities, their respective industries, larger sectors, and overall broader markets, the model provides compelling measurements of investor sentiment. This generates the ability to anticipate the direction and sustainability of micro, macro, absolute, and relative capital flows around the world's equity markets. These measurements form the foundation of Precise's investment decisions, executed by combining long positions in individual equities with short positions in related indices. All allocations and positions are the product of this structured, multi-layered quantitative analysis. Accordingly, no investment decisions are based on a single variable, assumption, bias or human input.
The multi-layered quantitative approach of the Precise Model is unique because it does not contain any fixed, dominant variable in its decision-making process. The Model anticipates and allocates dynamically in line with overall industry, sector, and market-specific directional trends. All input-variables are derived from a consistent measurement of each actively traded equity in a particular market. The result is a dynamic, active pulse/anticipation of investor-sentiment in and around an equity, industry, sector, or market.
The Precise Model does not select equities or markets. The Model generates consistent returns through allocating into each liquid component of a particular investment universe. Market trends are the result of the majority of all participants moving in a similar direction. The Models are engineered around this idea sourcing the majority of equities, and all industries/sectors as input variables. No single measurement or analysis ever becomes dominant. The overall portfolio allocation and directional positioning is a collective reflection of all measurements consolidated, i.e. the sentiment of the overall market.
- What are your target returns and volatility?
The fund's target return is 20%. The fund's positive relationship with market-volatility places the strategy into an interesting position as it performs well during times when most other equity portfolios face their toughest challenges. Annualised standard-deviations for the fund tend to be at the lower end of most other comparable funds and less than half of the MSCI AP Index.
- Has any of the Precise team had any prior experience with quantitative investment models?
Rene Raiss is the Chief Investment Officer of Precise Asset Management. Prior to founding Precise Group he has worked with Merrill Lynch's Equity Research Group in New York, and has been significantly involved with the Merrill Lynch Scientific Group. Rene has an extensive and comprehensive background in econometrics, mathematical modelling, statistics, and has more than eight years of experience in quantitative and technical modelling.
The Precise team also includes other individuals with experience in mathematics and systems engineering needed to develop and support Precise's quantitative and financial applications.
- In what market conditions does your investment model work best and worst? Does it rely on trending/directional markets?
The Precise Model allocates into each liquid component of an invested market without any particular bias. Allocations are made into equities on the long-side and market indices on the short-side. Directional limits are applied to keep the impact of drawdowns to a minimum. The Model manages allocations but does not select or prioritise equities, sectors, or markets based on relative comparison analyses. As 100% directional positions are not allowed, and positions are strongly diversified to minimise equity-specific risks, performance tends to be in line with market indices during positive trends, but provide positive returns during negative markets.
The only environmental bias that has been successfully measured around the models is volatility. While more volatile times do not change the overall accuracy of analysis, they do have an impact on performance. The fund does perform better during times of high volatility.
For example, 2001 has been the most successfully tested year during the past half decade because it showed the highest amount of absolute %-movement (regardless of direction) across most markets. To the contrary, in 2004 the majority of returns were delivered through market-specific net-directional allocations in trends of drastically lesser magnitude. Absolute %-movement of markets was significantly less, which translated into a lesser amount of delivered absolute returns.
While periods of high volatility and strong market direction tend to deliver the highest returns, portfolios are designed to dynamically adjust in allocation to less trending market environments. Without any significant changes in turnover, alpha is generated during such times through a distribution of sector-specific allocations rather than overall net-directional market positions.
- How often does the model re-balance the portfolio and is this re-balancing frequency restricted by transactions charges?
The portfolio is reviewed quarterly to achieve equal weighted equity positions and maintain net directional objectives. Historically, running stress tests across the past ten years of market data, annual turnover averages around two and a half times of total assets per year.
- How are you treating the subject of risk measures with the fund especially the currency risk, since your investments range from across the markets? Does the current speculation of de-pegging of Chinese yuan affect your risk position? Is the risk captured in your model?
The shares of the Asia Pacific Fund are denominated in US dollars, and the assets of the fund hedged into the dollar. Our risk management and foreign exchange activities are managed by an individual with over 20 years' experience including managing the foreign exchange desk of a major bank.
- What is your exit strategy under adverse circumstances? Do you employ stop-losses?
Investors should properly focus on exit strategies because many Asian investment funds commit capital to either illiquid markets or securities or both. We address this issue by first limiting our long equity exposure to only the most liquid shares in the more liquid markets in Asia. Therefore, in order for an equity to be included in our fund, it must trade approximately US$5 million per day.
We also minimise individual equity risk by holding a highly diversified portfolio which we expect to range from 200 to 350 individual positions. Furthermore, we employ short positions in index futures and options which effectively hedge out long exposure or in fact put us in a net short position during lean markets.
Moreover, the Precise Model has multiple layers of internal risk control and stop-loss procedures in place that are activated whenever allocations are significantly against the overall tide of the markets.
- Your investment style is to invest in "highly diversified liquid securities in Asian markets". With the high degree of correlation amongst these markets, how do you mitigate this market risk? How does your model take into account for the beta risk associated with the target equity securities?
The Precise Model recognises the high degree of correlation amongst markets and the beta risk associated with individual equities and utilises this fact in our allocation methodology. In fact, market risk, (ie strong directional market moves or inflection points), is the main driving factor of our portfolio alpha. Being exposed to large numbers of the most liquid Asian shares ensures a reliably efficient execution of our Models' dynamic adjustments in line with positive market moves.
In order to protect against temporary unexpected drawdowns or trendless spikes across markets, the fund is almost always hedged to a certain extent, parallel to being distributed over several hundred liquid equity positions. During negative market cycles, we expect equity positions to go to cash, and our short positions in liquid futures or options to increase until we are net short.
- What are some of the current views on hedge funds in Asia equity markets?
Many of the successful Asian equity managers have reached capacity and are no longer accepting new mandates. And we see very few, if any, long/short Asian equities managers that in practice go net short.
- 90% of the capital in Asian hedge funds is from Europe and the US. Are you planning to do a lot of "pavement pounding" in the West over the next few months or will you wait until you have a bit of a track record?
We have had the opportunity to meet with potential investors in Zurich, London, New York, Seattle, Hong Kong and have received considerable positive feedback. We are close to launching our fund but will continue to meet investors as we build our track record in parallel.