Ioannis Gaiganis reveals the success of the Cayman based fund in this interview with Eurekahedge. Essentia SPC was established on 26 October 2009 in the Cayman Islands and has two segregated portfolios – the Essentia Managed Futures from 4 April 2010 and the Essentia Diversified Derivatives from 1 January 2012 on initial offering period until 1 July 2012. The AUM of Essentia Managed Futures stands at US$5,109,410 at the end of May 2012.
The Asset Manager of the two Essentia Funds is Beneficentia Ltd, established on 27 March 2009 as a Cyprus-based company of alternative asset management with affiliated operations in Belgium. With expertise derived from over 20 years of financial advisory and HNWI managed accounts in Belgium, the combined expertise of management exceeds 100 years of professional experience in global asset management and banking. The company focuses on niche investment areas including managed futures, private equity special solutions and multi-asset strategies where we develop products of exceptional performance and solid risk management. We bring solutions that accommodate the needs of institutional investors, private banks, fund of funds, family offices and high net worth individuals.
For the Essentia Managed Futures Fund, management decisions are translated into trading through our own trading team of five individuals, applying the same strategy since 2003 for our managed accounts. Our other fund of the Essentia range; the Essentia Diversified Derivatives, invests in a wide range of thoroughly selected trading funds and programs worldwide including futures, options and CFDs.
We are also in the process of authorisation for our third fund, the Beneficentia Real Assets Fund which seeks long term capital growth through a diversified portfolio of underlying funds (fund of funds) consisting of real assets including distressed opportunities. At company level, we are currently awaiting our authorisation as a UCITS management company.
- The Eurekahedge CTA/Managed Futures Hedge Fund Index was down 2.37% in 2011, while your fund posted excellent returns of 56.4%. How were you able to deliver this exceptional performance in the volatile market environment?
- Can you give some examples of winning trades & positions?
- Over the last two years the returns posted by your fund have been quite volatile; can you elaborate on the factors contributing to this?
- How has this affected investor interest in your portfolio, especially considering the risk-averse sentiment in the market?
- Could you tell us a little about the diversification of your investment portfolio? Do you also invest in Eastern European markets?
- Tell us about the qualitative and quantitative research that forms a part of your investment process. Do you bank on electronic models for your research and trading? If so, to what extent?
- On an average, how many positions do you hold at any point in time? And, how often do you review each of them?
- Tell us a little about the risk management tools and practices you have in place to safeguard your investors’ wealth.
- Given the risk-averse sentiment prevalent among investors, have you attracted significant interest in your fund recently?
- You offer a unique fee structure (2:60) which goes against the trend of managers lowering their performance fees, has that been a concern for potential investors?
- What classes of investors (retail, institutional, HNW individuals, etc.) is your investor-base currently made up of? Could you give us a rough breakdown of the same? Also, how is this spread geographically?
- Could you give us your near-to-medium-term outlook of the equity and commodity markets? Do you foresee any new trends taking shape? If so, how do you think these would impact the performance of CTA/managed futures funds for the rest of 2012?
Our fund was able to generate above market returns because it does not rigidly apply a one-sided strategy but rather, combines contrarian, fundamental and quantitative analysis in order to exploit particular characteristics of price behaviour and capture profitable market trends. Based on quantitative and technical analysis of market data, it exploits price patterns to which it seeks participation through a fully pre-defined approach. Positions are gradually build up or down by scaling in or out (not averaging down) while signals used are linked to overall invested assets, fund NAV, relativity to other positions of the fund, and volatility limits of particular indexes and stocks.
Our fund performance in 2011 and in the previous years has based its strategy on the expectation that trends occur more often than not and that such trends – if adequately exploited – can deliver attractive returns. The resulting return patterns were, and remain, cyclical rather regular but offer reference signs in their cyclicality. This explains the reoccurrence of extended drawdown periods followed by stronger positive performance while our trading team builds up positions with the expectation of an imminent turnaround.
Winning trade in October 2011 with forex pair yen-US dollar, short on the yen.
Winning trade futures on the Russell 2000 Index with big winning from May 2012 off.
The volatility of our fund is due to particularity of the trading program, which is based on the expectation of a turnaround and an insistence on a particular stance without deviating from our belief that such turnarounds will occur.
The volatility of our fund is important on a month-to-month basis but tends to deliver consistent performance on an annual basis. It is not always understood in the Institutional and HNWI world as the fear of the investors for the moment is greater than the acceptance of the wining concept/strategy. We seek to capitalise on investor common sense which when they accept the solidity of the pattern over the historical track record of over nine years, they also understand how to take advantage of this volatility which is voluntary and logic. Investors that are capable of adopting this way of thinking and that decide to include the Essentia managed futures fund in their portfolios for an allocation of 5% to 15%, benefit from the mid-to-long term consistent return.
The fund invests in managed futures, mainly on the very liquid indices like the NASDAQ futures, the S&P futures, the Dow futures, the Russell 2000 Index futures and on forex pairs, mainly the two most liquid forex pairs US dollar/yen and US dollar/euro. The fund also takes advantage of futures gold and silver. We currently do not invest into Eastern European markets where analysis is temporarily challenging in light of the overall European political and macro-economic challenges.
Our team is using technical analysis as well as event driven macro analysis to build up the fund’s positions. Every trading decision in the fund is always taken on a discretionary basis.
On average the fund holds three to four positions that are more or less built up. The team is active from Sunday evening at the opening time of the futures markets and operates non-stop until the close of the futures markets on Friday night. During the weekend our management team holds strategic meetings with our traders in order to set out the new parameters to be used by our trading team in the following week.
During the weekly strategic meetings between our fund management team and our trading team, the risk parameters are defined as signals linked to overall invested assets, fund NAV, relativity to other positions of the fund, and volatility limits of particular indexes and stocks. We define our risk parameters in a very close framework and under the constant control of our fund management team. We conduct daily reviews during which we control all the trades of the fund.
Despite the interest we generate when presenting our fund and its consistent returns or awards, we have to face the risk-averse sentiment of investors linked to macro events that do not enable investors to always admit the logic of our trading consistence. To counter this insecurity, we advise investors to allocate a small percentage of their portfolio into our fund and in 2012 we introduced new features to the fund making it adapted for a limited defensive allocation from our investors.
We insist on investors looking at the net return of the fund which is high enough to justify our own performance fee. On the other hand we have different classes in the fund, like class A euro where we do not apply any management fees and only 50% performance fees. Our investors also appreciate the fact that our fund performance fee is linked to a real high watermark that is never being reset. We believe this to be a very honest approach towards our investors.
Our fee structure is also discussed with institutional investors where we are open to adopt a more tailor made approach depending on their investment potential. At first sight our fees seem indeed quite high but after looking deeper, investors realise they know what they are paying, why, and only when the fund generates above market returns.
Currently because of the limited size of the fund, our investors are mainly HNW individuals. As the fund was born out of a program of privately managed accounts, the geographical spread for the moment is still mainly northern Europe. This is gradually changing as the additions to the Beneficentia management team bring institutional expertise with a global distribution reach including promising markets like the MENA/Gulf regions, the CIS region and Asia. For the US markets, we are currently contemplating various legal setups that would allow US-based investors to invest into our funds without complications.
Long term trends points towards a slower than anticipated growth, a lasting recession in Europe, recession signs in China. Japan is also below expectations and we see very slow growth in US. Markets of the emerging world are also affected by the global economic slowdown. In line with all these beliefs that impact markets negatively, we try to indentify imbalances that can be captured by our fund management team and translated into short trading positions.
We also have to deal with the short effects of quantitative easing (QE), be it in the US, Japan, UK, China or Europe. As this money is not used to finance growth but rather to park it with central banks, we do not see these cash injections as signs of market recovery but rather as a confirmation that our macro view is correctly founded. This temporary liquidity has adverse effects that make our fund management work more challenging because they may artificially extend the drawdown periods of our trading strategy and delay the turnaround that we anticipate. The positive effects of QE cannot sustain the temporary rebounds and our funds end up benefiting from the expected corrections. We also believe that we are at an advantage against many trend following automated trading futures funds (85% of the futures trading programs/funds) which are facing bigger challenges because their models are mostly based on historical data feeding models that require constant adjustment on a discretionary basis.