Interview Martin Estlander – Estlander & Partners

Stockholm (HedgeFonder.nu) – Martin Estlander, founder of Estlander & Partners (E&P), has managed institutional assets through systematic trading strategies since 1991. Based in Vasa, Finland, total assets of around 800 million EUR are today managed through E&P’s three strategies Global Markets, Alpha Trend and Freedom. Alpha Trend is a pure trend-following strategy, while Global Markets uses a combination of fundamental data and price data as input. The Freedom strategy in turn combines Global Markets and Alpha Trend, and it is available both in UCITS and non-UCITS format. As for other CTA’s, the performance of Estlander & Partners’ products has seen a challenging environment since 2008. During 2013 however, performance especially in the Alpha Trend program has taken on renewed strength, and if one is to believe the manager’s own view, this is partly thanks to a more trend-friendly market environment. HedgeFonder.nu used the occasion to check with Martin Estlander what he has to say about the recent development and challenges, and also to look back on over 20 years of successful systematic management.

HedgeFonder.nu: You started to develop systematic futures strategies already in 1991, at a time where the computerized world was still at its beginning, how would you compare the challenges then to those of today?

Martin Estlander (pictured): You can answer the question from two angles. On one hand you can of course say that a lot has changed, but on the other hand the changes are maybe not that big after all. Let me go further into what I mean.

What has changed is of course the CTA industry itself, which has grown enormously. CTAs are today an established, well-known and well-used strategy. Markets have become increasingly automated and thereby more liquid. As the industry has grown, so has regulation, especially in Europe, to what is today quite a burdensome level, and the barriers to entry for new managers have thereby increased dramatically. Whilst in 1991, you could start with a computer and 100.000 USD, today you would need to put a big multiple on everything. Seen form this angle there is therefore both new possibilities and new challenges for us as managers. Too much regulation at least in the short term represents a challenge, as does market manipulation by central banks.

On the other hand, what has not changed that much are the possibilities that appear as the world and economies change. As investors we humans are just as irrational and just as driven by our behavioral patterns as 22 years ago, something that therefore continues to create possibilities for systematic strategies.

Hedgefonder.nu: Do you see it as an advantage to have been there early on in the development of the industry?

Martin Estlander: Absolutely. Markets are cyclical and we humans tend to be quite short-sighted in our ways of thinking. During 30 years many cycles have come and gone and the perspective of this, the possibility to reflect on events against your own experience, in my view helps to avoid mistakes and to actually see the woods for the trees.

Hedgefonder.nu: Since the beginning, Estlander & Partners have had their base in Vasa in Finland, far away from the large financial centers of this world. How do you ensure regeneration in research in such a small market?

Martin Estlander: We have an excellent educational system in Finland and as a company, our strategy has been to maintain good contacts with universities, both for research projects and also to have a ”first shot” on top talents. This has worked well. We have in total 150 years of experience in managing assets in the team and we have also recruited experienced people from London, as a complement to younger talents. This has not been an insurmountable task. Notably Newsweek has ranked Finland as the world’s best country to live in.

HedgeFonder.nu: What is the single largest threat to actively managed futures strategies in the future?

Martin Estlander: In my view, politicians with an uninformed perspective can hurt markets by imposing false regulation, possibly even taxes. Such short-sighted interventions can reduce market liquidity and hereby raise, not lower, the risk for investors, increase demands on risk premium etc. All of this would constitute a threat to our strategies, which are built on liquidity. I am not particularly worried though – on the contrary, I have a firm belief in free markets and that common sense prevails.

HedgeFonder.nu: Martin, what is your fundamental management philosophy and how does it show in your underlying programs?

Martin Estlander: The world and markets change. Investors observe these changes and are driven by their human behavioral patterns, and therefore influence prices in a way that often leads to price trends. These trends can be exploited by systematic strategies, which identify trends by observing price patterns, and by analyzing fundamental macro data.

What we do is to invest risk capital in these possibilities, whilst at the same time carefully allocating and controlling the risk we hereby expose ourselves to. Doing this systematically is to us the best guarantee for not allowing our own behavioral patterns to play any tricks on us – after all, we are no more than human. Referring to your previous question, these basic principles have not changed at all during 22 years of managing the strategies. The principles have only been refined along the way. Permanent research is critical to maintaining a position at the cutting edge of development.

HedgeFonder.nu: CTA strategies have had some tough years, what are in your view the biggest reasons why CTA’s have not reached their historical performance level since the record year 2008?

Martin Estlander: We experienced the biggest financial crisis in 80 years. As a consequence, investors’ risk exposure has been reduced and we have seen a marked “de-leveraging”. Such phases typically lead to increased correlation between asset classes and so called “risk on – risk off” behavior, i.e. investors are either prone to take on more risk or alternatively to reduce their risk exposure, and this becomes a dominant factor in most market movements.

In addition, markets have been manipulated by central banks and politicians, who have influenced free market movements in a way that is challenging to systematic models.

Given the crisis was larger than in a long time, its repercussions were also more sustained.

This year has shown us that the worst is over for this time, and we have observed a clear market normalization.

HedgeFonder.nu: The weak performance of CTAs in the last years has again brought up the question if trend-following still works as an absolute return strategy, what are in your view the factors that speak for that still being the case?

Martin Estlander: The fundamental relationships I previously mentioned. Our human nature continues to influence our market behavior, and all decisions have a bit of emotionality associated, that is not always rational. We also know from experience that markets can be manipulated for some time, but that such manipulation never works in the long term.

During the last 20 years we have had several periods where investors have been disappointed by short term CTA performance. On each occasion there have been observers that have pronounced the strategy dead, something that is usually associated with a lack of understanding of the basic market trend mechanisms.

Hedgefonder.nu: Alpha Trend has had a very good start to 2013 and has outperformed industry benchmarks, what is it that has made markets easier to navigate this year and why has Alpha Trend managed this better than many others?

Martin Estlander: Generally the market normalization we have observed that I previously mentioned. More specifically, both Alpha Trend and Freedom that has also done well are quicker to react than many other strategies, and that has enabled us to capitalize on the quite strong movements we have seen this year. Furthermore Alpha Trend has a more diversified portfolio where commodities are of relatively greater weight in relation to correlated financial instruments than for most CTA’s. This has proved beneficial now that market correlations have come down and risk on – risk off has increased.

HedgeFonder.nu: What differentiates your underlying trading programs and why is a combination of Alpha Trend and Global Markets a good idea?

Martin Estlander: Alpha Trend is a pure trend-following strategy based on price analysis, whereas Global Markets has more components like systematic macro, short term trading, relative value etc. as a complement to pure trend-following parts.

Investors seeking a pure trend-following strategy prefer Alpha Trend, whilst those wanting a larger portion of systematic macro prefer Global Markets.

In the Freedom Fund we combine all our strategies to a multi-strategy fund, hereby offering our investors critical de-correlation to traditional assets through one line in the portfolio. Choosing Freedom means investing in all the knowledge, all the models and all the experience we have accumulated over the last 22 years. Both in our own and many investors’ view, this is characteristic of a flagship product.

HedgeFonder.nu: Today you have around 800 million EUR in assets under management and are hereby, compared to the big dragons, a relatively small player in the CTA world. What are the main advantages and drawbacks being small, and how do you view capacity constraints in the world of managed futures?

Martin Estlander: Smaller assets enable us to be more flexible in markets, especially in less liquid instruments that larger players can only include at reduced portfolio weightings. We view this as a great advantage. In addition we experience less trading slippage.

A drawback is that many investors do not dare to invest in anything but well-known brands, and that Finland as a country does not belong the world’s more well-known financial hubs. However, the fact that investors become more familiar with our part of the world, mostly thanks to many good Swedish managers that have developed over the last years, is something that is very positive and that we are very happy about.

HedgeFonder.nu: How do you view the increasingly restrictive regulation that surrounds alternative investment products, including managed futures?  Will the increasing cost of adapting fund structures mean that smaller investors will have to get used to higher fees?

Martin Estlander: No, I do not think increasing regulation leads to higher fees. Tasks quite simply need to be adapted and automated.

What it does mean however is more consolidation and fewer suppliers of alternative investment products, and hereby a reduced offer to investors. Everyone is free to speculate as to whether this is in the interest of investors or not.

At the same time, more regulation should make it easier for investors to allocate to alternative products as an asset class, something that with time will increase assets under management. Sweden and Finland are two good examples of how good regulation has contributed to greater acceptance and higher market penetration for notably managed futures, compared to many other, if not all other countries.

The usefulness of regulation does not depend on the quantity but on the quality. Here we see the new AIFM-directive as a positive phenomenon, even if we think it still has room for improvement.

HedgeFonder.nu: Looking back at a long history of managing futures, what would you say is the single most important lesson you have learnt over the years in terms of financial markets and the development of systematic strategies as a way to constantly extract alpha over time?

Martin Estlander: Discipline is crucial, both for the strategy and for running a successful asset management business.

HedgeFonder.nu: Can you share some of your market wisdom with us?

Martin Estlander: In my experience, you need to stay humble at all times and assume that markets can be right.

This interview was originally held and published in Swedish language.
This interview was also published in Finnish language.