“I do believe that many institutional investors out there have started looking at hedge funds with a more positive view on the space as a whole.” – Anders Lindell (Tweet)
How do clients understand a trading strategy so that they stick by the firm in hard times? How do investors make sense of when things go well for the CTA industry. We dive into these questions and more on this next episode, a year-in-review from Anders Lindell of IPM.
Thanks for listening and please welcome Anders Lindell.
In This Episode, You’ll Learn:
- Why 2014 was a model-proving year for IPM.
- How relative bond trading worked so well for his firm.
- How the world events of 2014 affect how much risk people take on in general.
- Why his models got the Russian Ruble wrong.
- Anders’ new role within IPM that was a highlight for him during last year.
- How conversations with investors changed over the year.
“We have the advantage of being able to frame our trading based on relatively understandable concepts.” – Anders Lindell (Tweet)
- How Anders thinks about divergence in context with the market’s past history.
- How he makes sure that clients know what they are buying into.
- Why he wants a normalization from the central banks.
Resources & Links Mentioned in this Episode:
This episode was sponsored by Swiss Financial Services:
Connect with IPM:
Visit the Website: www.IPM.se
Call IPM: +46 8 20 19 29
E-Mail IPM: email@example.com
Follow Anders Lindell on Linkedin
Anders: There's got to be a well-founded reason why you as an investor would want to have that particular exposure as opposed to just chasing the alpha. So I guess that the main message here is really being open with your clients, but also trying to confirm for yourself these clients that were not taken on board, that they actually know what they're doing. And that they know why they're buying into our particular strategy. If you get the feeling that they don't then you should probably be prepared to see them leaving the minute you start generating negative returns again.
Hi, this is Anders Lindell, Founder and Chairman of IPM in Stockholm, and you're listening to my year-end review on Top Traders Unplugged.
Introduction: Imagine spending an hour with the world's greatest traders. Imagine learning from their experiences their successes and their failures, imagine no more. Welcome to Top Traders Unplugged. The place where you can learn from the best hedge fund managers in the world, so you can take your manager due diligence, or investment career to the next level. Here's your host, veteran hedge fund manager, Niels Kaastrup-Larsen.
Niels: Welcome back Anders for this review of 2014 where we look at the big events from the point of view of your trading strategy. I want to explore both the ups and the downs as well as the big takeaway from what can only be described as a great year for systematic trading strategies, in general. But as we know, just because you're systematic in your trading, doesn't necessarily mean that your strategy deals with market environments, in the same way. So let's just jump into it! Tell me about 2014 from your perspective. How did the year evolve from your firm and your strategies point of view?
Anders: I think for the first highlight, to note, is that this has been a year when our style of trading has basically proven what it's all about. And what I mean my saying that is simply that the way we trade is based on current data as presented. We're not trying to make forecasts about the future; we're not trying to follow the flow of other traders or anything like that. So, as sort of a great example to start off with is basically to look at our bond positioning, where we've been long double bonds and bond markets in general for the most part of the year. And certainly the early parts of the year. And I guess as opposed to many other people out there who started making forecasts about what the Fed's going to be doing, and what growth's going to be doing, things like that. Our models just concentrate on looking at the data set as presented, and based on that staying long bonds turned out to be a very good bet.
And this is one of the sorts of hallmarks of this type of trading. We're not trying to make forecasts; we're just looking and analyzing the data as it is presented to us. So that's been one sort of major theme for the year, you know, systematic macro trading. Our style has proven that it actually works in this type of environment, something that a lot of people out there seem to be questioning a little bit. Another thing, that we are continually proud of, is to note that our trading continues to be strongly diversified. If you compare our performance even to other systematic traders out there, be they CTA's or even closer to us, our performances has generated in 2014 still differs markedly in the path it has taken. Which is, you know, we're proud to continue doing that, and while being by design, it is always good seeing it confirmed.
Niels: Sure. No, I did notice actually that you had a very strong first quarter of 2014, which was a very difficult time for CTA's, so you're absolutely right on that. What were the biggest contributors? I know you mentioned bonds, but generally the biggest contributors both on the upside but also on the downside for the year?
Anders: Taking it by the dimensions we're trading, the biggest by far contributor was a relative bond trading. Where we trade ten new government bond futures against each other in dollar neutral, or akin to risk neutral fashion. The second contributor - currency trading in developed markets. Then our asset class, which is basically our directional trading in global stocks and global bonds, emerging-market currencies, and those four are all positive. The only dimension, where our trading generated a negative return for the year, was our relative equity trading. So that's sort of in terms of the dimensions. If we should talk about individual positioning, it requires a little bit more explanation. But certainly the biggest contributor year to date has been… or 2014 has been our positioning in Japanese Government Bonds. Coming in at a… close to 9% positive for the year. The biggest loss for the year, individual instrument wise, would be our Treasury trading, ten years… generating a loss of close to about 7%.
Niels: Now, clearly the year was a year with some big moves in many markets. And I know that when you are systematic, you don't necessarily look at it the way of saying, "Oh, I did really well here, and I did really poorly here," because it's part of the process. But, on the other hand, we do look at the rearview mirror, and we look at what happened, and we look at how we did. And when you do that, is there anything where you would say, "Actually I thought we would have done a little bit better here than we actually did?" Where maybe it gave you ideas of things that could be, maybe fine-tuned, or something like that?
Anders: We rarely do that on an instrument basis. Where we could do it, and where we certainly do, do it is from time to time, we take a look at what are the underlying themes we are trading on and how are they faired during a course of any one particular period. And if you use our relative bond trading, which has been the most successful in 2014, as an example. We'll note that pretty much all of the themes that we're looking at having delivered, say for one notable exception, and that is our evaluation based ideas. So while we've generated strong returns expressed by, or delivered by a risk premier type factors and certainly macro factors and other things, evaluation has persistently underperformed during the course of 2014. And this is obviously something we're going to have to take a closer look at, and something that we are looking at and evaluating. Bearing in mind though that valuation is a very long term phenomenon. It might very well… and it's pretty natural for it, to actually go against us for quite some time… or mean reverse, significantly later. So it's not the course for immediate concern, but notably it has underperformed. So quite clearly we're looking at it and just trying to verify that this is indeed in line with expectations statistically speaking.
Niels: Sure. You mentioned the word "theme," and I just want to pick up on that. Now clearly 2014 will probably be remembered for certain themes if we look at it sort of from a world's point of view: Ukraine as a theme and Russia's involvement in that. Oil as a theme. And I know that you don't trade those "themes," but how do you view your strategy's reaction to those themes? Were they important for your result do you think? Or were they just there as part of a normal way of dealing with world events?
Anders: It's a hard one to answer. I mean, obviously anything relating to what happens over in Russia, and neighboring countries has impacted people's willingness to take risk in general. And it certainly has contributed, in at least some extent, to volatility in markets. And from that perspective, you know, we're probably pretty happy. We're obviously not happy that Russia has done whatever it has done over in Ukraine and Crimea and other countries. But increasing market volatility, and sort of decoupling between markets is a central theme, if you'd like, for us. Because the way we trade, I wouldn't say we are 100% dependent, but we're certainly trading better when cross-market volatilities, or market dispersion if you like, is more pronounced than it is otherwise. So anything, that contributes to a more normal volatility pattern across markets, is beneficial to us.
Niels: Do you trade the Russian Ruble?
Anders: We do trade the Russian Ruble.
Niels: How is that?
Anders: We got that one entirely wrong. Obviously our models didn't quite see… neither the Ukraine thing nor the Crimea thing, nor the impact of sanctions and other things. So certainly it had no clue whatsoever about the oil price impact on the Russian economy. So we got that one completely wrong.
Niels: But actually on the Russian Ruble, what about market access? We don't talk much about this, but I certainly understand from other managers who had exposure to the Russian Ruble, that suddenly it became very difficult to trade, let alone get it right. But actually physically execute trades in Rubles, did you see any of that?
Anders: We managed to trade it alright, but quite obviously, you know, given what has transpired liquidity has gotten it worse. There's not a lot of doubt about that. But we managed to trade it without any significant problems. But I think you should probably put that in sort of a holding period perspective. Where many people, certainly more high frequency CTA's are entirely dependent on being able to get in and out in positions on sort of a weekly, or in some cases probably even a daily basis, or even high frequencies at that. Whereas our holding periods are so much longer that the impact of constrained liquidity is much, much less.
Niels: Sure. In terms of, sort of generally for the year, and in terms of you and your firm, were there any sort of highlights? It could be a new product; it could be changes to, sort of key personnel, or some research findings that you want to highlight?
Anders: On all of those areas, much like in our trading, we're sort of moving at a very, very slow pace, we're moving very gradually. I guess the only main thing, I'd probably mention, is sort of an organization change where I stepped up from being the sort of president and CEO to becoming Chairman, midyear. Otherwise, organization-wise, I wouldn't say that there are any significant changes. On the research side, it's probably better to get back to that sometime later in 2015. There are a couple of things that we have on the agenda for introducing during early 2015, so that's probably more relevant, slightly later.
Niels: Let's do that. Now, you obviously had a very solid year performance wise, and that comes on top of having very solid returns in general. So, maybe this is not so applicable to you as a firm, but maybe more from the viewpoint that the industry had a better year than for a while. How did the conversations that you had with investors or potential investors… did that change over the year? Did people start looking at you or the space as a whole in a different light?
Anders: I think we can observe a couple of things, or note a couple of things about 2014 from sort of a client perspective. The first thing is, I do believe that many institutional investors out there have started looking at hedge funds with a more, sort of positive view on the space as a whole, during the course of the year. And a slightly higher appetite for taking risk by way of investing in hedge funds. I guess the main change in attitude there would probably come from the European arena. Whereas North Americans have been more consistent in looking at hedge funds over the past few years. But certainly there's been a little bit of a shift in a positive direction, the way people are looking at hedge funds in general.
The other main trend is, (I guess, unfortunately, for our space) a continuation of I would say some degree of skepticism towards systematic macro space in general. Probably with a tail towards CTA's where, you know, you sold CTA allocations between 2008 and probably peaked in '13 or so. It ballooned from less than a hundred billion to well north of four hundred in just a few years. And I guess people started to re-evaluate that in 2013, and the spaces has seen outflows I guess, ever since. And that has certainly continued in 2014. And while that has been centered more on the pure CTA's, rather than systematic macros like ourselves. It obviously affects people's view of the space and such. Both positive and negatives, more people looking at hedge funds in general in a slightly high-risk appetite for hedge funds countered to some extent by, you know, continued skepticism towards systematic traders.
Niels: Sure, sure, very interesting. Now, you trade the globe so to speak in your global macro approach, and I wanted to bring up something that I noticed a couple of weeks ago. Mohamed El-Erian, ex-PIMCO, who many people listen to, and for good reason of course. He said something that I thought was quite interesting; he said, "If I had to sum up the world in one word, it would be divergence." And you and I know that many hedge fund strategies don't necessarily thrive in a divergent environment, because they actually probably do much better in convergent times. When you hear something like that, do you observe, generally, when you look at all the markets and the way you trade do you observe signs that the world is becoming more divergent? And if so, what impact do you think that that makes on the global asset allocations that people should be considering for the coming year?
Anders: I think it's an interesting question, but to answer it, one has to take a step back and sort of look at where we're coming from. We're coming from an environment where global economic developments are being converging and marching in step, increasingly over the past decade. At least probably for longer, but certainly very pronounced over the past decade. So, when Mr. El-Erian says, "We've started moving in the other direction of more divergence." His words, I think, are probably right. But we started moving in that direction from a starting point where the world has converged over the past ten years. So, I think looking at it in absolute terms is the world going to take a few steps back and become what it was ten, fifteen years ago? This is hardly likely over the course of the coming couple of years. Some degree of divergence we started noting already, and again as I mentioned earlier, looking at sort of market development and market dispersion, I think that's, generally speaking, a good thing for most macro traders. Not necessarily… I wouldn't claim to know what actually makes CTA's tick. But certainly for macro traders, we actually want divergent markets in the sense that things should move back to tracking business cycles and we want market,.. to be able to trade markets that are both cheap and rich. If all markets are rich at the same time or be that asset class wise or that country wise, or all markets are cheap at the same time, then that doesn't leave a whole lot in terms of our opportunity set.
Niels: Sure. I mean you touched upon it already when you talked about the CTA space, but let's just call it systematic traders in general. The way we saw a big inflow in 2009 and '10, following a very strong relative performance in 2008. 2014 certainly, relatively speaking, was a big outperformance from the same space even though we didn't have any crisis as such. So my question is, how do you think we as managers, how should we approach 2015 to try to avoid the big inflow of money chasing performance only to be potentially redeemed a couple of years later when people realize that they maybe didn't understand exactly what they bought? Or at least that's what they would claim that they didn't understand, what they bought. How do we better prepare ourselves, the industry, and more importantly maybe, our potential investors for the next move into this specific space?
Anders: That is an interesting question. I'm sure the way you posed the question that out of the, I don't know, fourteen thousand hedge funds in total out there globally, I'm sure that at least thirteen thousand out of those find it to be a peculiar question. How do we avoid taking on too much money? Only to be having to give back at some point later. I really think it is… the heart of the matter is really education or transparency, or alignment. However you want to phrase it. The way we see our clients coming aboard is only after a very thorough evaluation of what we do, what we have generated. But adding to that, we also try and make a point out of making sure that our clients actually do understand what it is we're doing, and what it is they're buying into. Which I guess might be… it might be slightly easier for us, because you know, if you're saying to an institution investor that parts of our currency trading is based on relative inflation between two countries, that's something they're used to hearing, that's something they learned in university, their economists would talk about things.
So when we have the advantage I guess, of being able to frame our trading based on relatively understandable concepts. Whereas if you're a more pure, I guess, CTA then, it'll be slightly harder. But I think your task then, much as our sort of side task is really to highlight why is it you're buying into this? You're buying into a systematic macro manager because you seek the diversification benefit, also you want the absolute return, but also you need something that has a car coupling to your underlying portfolio. And I guess the same holds true really if you're a CTA. There's got to be a well-founded reason why you as an investor would want to have that particular exposure as opposed to just chasing the alpha. So I guess the main message here is really being open with your clients, but also trying to confirm for yourself that these clients, that we're now taking on board, that they actually know what they're doing: that they know why they're buying into our particular strategy. If you get the feeling that they don't, then you should probably be prepared to see them leaving. The minute you start generating negative returns again.
Niels: Yeah, no, absolutely. I've actually only got one question left for this short episode. But before we go there, is there anything that you want now that we're heading into 2015, anything you want to bring up, you know, just for people to consider maybe for the New Year, or anything that you feel strongly about?
Anders: There's probably a whole lot of things I feel strongly about. I guess…
Niels: It could be a theme that you've talked about internally for the last couple of months, since we last spoke that you think is important.
Anders: Yeah, I guess theme wise, what I guess everyone wants, and what certainly we want is a normalization, in the sense of it would be a very good thing to see central banks sort of normalizing their behavior. How and when? The sooner, the better. It is inherently a bad thing to have the price of money sitting at about zero for an extended period of time. All sorts of unattended consequences could, probably will, come out of that. So that would be one of the most important contributions to a normalization of the market, and I would actually say risk reduction, because this type of pricing of money certainly increases rather than decreases risks. Over and above that, I have just a quick note. I guess everyone feels the same, but given the last weeks of events in France, Germany, other countries, it would be a great thing to start seeing, in particular, European politicians actually taking matters of immigration, etc., etc., for real and actually start addressing it in a much more sensible way than what has been done so far.
Niels: Sure, sure. You kind of probably answered my last question, which is usually nothing to do with anything about trading or anything like that. And what I've asked all my other guests is really just if they could make one wish for the New Year, what would it be? I don't know whether you would say it's the same things you just brought up or if there's something else that you think would be nice to happen in 2015?
Anders: I guess you're spot on really. I think one could always hope for central bank normalization, and we know that those are sort of bureaucrats and eventually they will come to that. I would guess I would put the European politics as it relates to, shall we call them, extremist parties, and movements, and immigration policies, and tensions in society in general. And we can note that even in Sweden we have gotten on our small but still fresh air that… really European politicians taking this for real and actually start having a sensible debate around those topics to try and actually get people more sensible, in a way, again.
Niels: Absolutely. Well, on that note, and as, unfortunately, our time is running out, for this short episode anyway. But, of course, for those who want to hear more from you, they can always go back and listen to our previous conversation on Top Traders Unplugged. But I do want to thank you for being on the podcast today, for sharing your insights, I want to congratulate you and your firm for a very solid year, and I want to wish you and everyone around you the best for the coming year, and look forward to catching up later in 2015!
Anders: Thank you very much Niels. And I wish you, and certainly our listeners the same. Thank you.
Niels: All the best. Take care Anders.
Anders: You too! Bye.
Ending: Thanks for listening to Top Traders Unplugged. If you feel you learned something of value from today's episode, the best way to stay updated is to go on over to iTunes and subscribe to the show so that you'll be sure to get all the new episodes as they're released. We have some amazing guests lined up for you, and to ensure our show continues to grow, please leave us an honest rating and review on iTunes. It only takes a minute, and it's the best way to show us you love the podcast. We'll see you next time on Top Traders Unplugged.
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Date posted: 19 Jan 2015no comments