Stockholm (HedgeNordic.com)- One of the few hedge fund managers newly opening its doors to investors from Norway in the recent years is Oslo based Asymmetric Asset Management. The company currently manages one product. Asymmetric Global Macro Fund invests in physical and derivative instruments related to Fixed Income, Foreign Exchange and Equities with the main objective of generating long-term absolute return.
We had the opportunity to meet with the fund managers CEO, William Härter (pictured), in Oslo and follow through with an interview, so here is what he had to say:
HedgeNordic: Can you describe your trading approach to us in more detail?
William Härter: We invest in high-conviction “themes”. The portfolio may comprise 1-5 themes at any point in time. A typical holding period is 1-12 months. Some of them are kept shorter, some longer. The portfolio could be rather concentrated at times, while benefiting from exposure to a large number of themes over time, which offers the portfolio diversification. We target the fund’s volatility in the range of 10-20% over time, with the aim of adjusting the risk according to what opportunities are present, while also leaving us with a chance to stick with a “theme” long enough to exploit the opportunity. This could involve a certain level of volatility.
HedgeNordic: You describe that you are looking for and exploiting “asymmetric conditions“, and of course carry the term asymmetric in your name, too. What exactly are asymmetric conditions and how do you try to profit from them.
William Härter: We find that classical financial theory is overly optimistic about i) the rationality of investors, ii) the normality of probability distribution, and iii) the continuity of market prices. In our view, financial markets are unstable, non-linear systems highly predisposed to financial instability. A natural feature of any market with inefficiencies or imbalances is the existence of asymmetry between the risk you take and the return you expect. We aim to benefit from such inefficiencies by identifying the “drivers” of asymmetry, and invest only in high conviction “themes” perceived to offer the best returns vs. risk.
HedgeNordic: Having a discretionary market approach, please let us know a bit more on how you generate trading ideas.
William Härter: A discretionary approach requires long experience with analyzing and trading in certain markets and instruments. We study business cycles and geopolitical environment in general, and perform focused analysis on the drivers of “the theme” or “the asymmetry”. Such analysis involves the study of macroeconomic data, central bank actions, liquidity situations, financial flows, instrument valuations/pricing, and economic history.
The next step is to formulate the strategy, budget the risk, and implement the trade. Gunnar Pedersen, the fund manager has built up the necessary level of experience with absolute return investing since 1996, and he has performed well. His primary focus is Nordic markets, although global market inefficiencies are studied and taken advantage of, too.
HedgeNordic: How do you determine position size, market timing for entry and exit?
William Härter: The strategy formulation is a very important phase. First, we need to decide whether the opportunity is best approached through fixed income, currencies or equity, and whether to employ a directional investment or a spread; a yield curve-, a credit curve-, a country spread. It is always of utmost importance to invest as close to the core of the imbalance as possible, in order not to experience too high influence from exogenous factors.
The final phase before implementation is to size the position according to a) the level of conviction, b) the volatility of the underlying instrument/market, c) the perceived potential for loss, and d) the investment horizon. Some asymmetric conditions may run out of steam early, leaving us with a short window of opportunity and the need to act fast and effective. It may be exited just as fast and efficiently, and we aim at sticking to liquid instruments. Other asymmetric conditions could take a long time and with a certain level of pain before the market or instruments find their way into balance. In such an environment we may have time to build up a position at a certain pace, while also wind it down at a certain pace.
HedeNordic: Is the processes for exiting a winning or loosing position comparable? What is the ratio of winning to loosing positions?
William Härter: The ratio between winning and loosing months is important. So is the observation of fat tails in the return distribution. The fund has 55% winning months since start, while the longer track of the fund manager’s record shows 60%. Entry and exit of a theme/position is handled similarly with regards to the expected duration of the opportunity.
We will build up a position if we find confirming data or price development. Similarly, we will reduce or fully cancel a position if we find data or a price development that contradicts our expectations. The handling of stop-loss is at the fund manager’s discretion, and a faster pace of risk reduction is sought in times of increasing volatility or in a draw down phase. A draw-down in the fund will reduce the available risk budget, and may force the fund manager to reduce the exposure in the event of a medium term negative performance in a “long-term” theme. The aim is to generate positive returns over the long haul, while also preserving capital.
HedgeNordic: The first half of 2014 seemed to be somewhat challenging for you seeing it slightly negative for the year, despite very strong performance in July (+2,48%). February sticks out of course with a loss of 6,5% of NAV. Can you talk us through the challenges of the more recent track record?
William Härter: Stock markets and credit markets have benefited well from the abundance of liquidity derived from monetary stimulus, and from some comforting pieces of macroeconomic data from i.e. the US and from Spain during H1 2014. Low volatility, flat yield curves, and a market that does not respond to exogenous shocks has been a challenge for our fund in 2014. Interest rates and credit spreads have trended lower, and stock prices higher despite several geopolitical and macroeconomic factors that could have suggested otherwise.
These observations remind us of a pattern where markets and instruments are building up imbalances. During H1, we have had a base position that expected higher volatility and for adverse price moves in fixed income- and equity markets. This turned out to be wrong, although the accumulated cost for our mistakes have been low. In such instances, it has been of utmost importance to cut the losses and reduce the risk until more favorable markets or themes appear again. In February, the fund experienced a negative return for the above reasons. Some positions were cancelled while others were scaled down after the loss.
The remaining exposure produced a positive return in March and in April. We experienced that changes in volatility must be carefully considered when entering themes with a long horizon. By the end of July implied volatility and risk premiums in financial markets were close to “all-time-lows”. We are cautious when we interpret the levels of implied volatility.
Often, risks are building up as volatility drops. Low volatility and risk premiums could rather be a signal of a market that is getting complacent. The fund has circled around zero return in 2014, but we are hopeful that the present market conditions leaves us with opportunities that can be benefited from going forward.
HedgeNordic: Which market environment do you expect Asymmetric Global Macro Fund to perform best, and what trading conditions tend to be most difficult for your approach?
William Härter: The fund manager’s 17 years of track record shows proof that the strategy has produced very good returns during times of financial instability, high volatility and identifiable asymmetric conditions. In more stable markets, the fund should benefit from long trends up or down in fixed income, currencies or equities. Low risk premiums, low volatility, and flat yield curves are more challenging for our fund.
HedgeNordic: Your track record is broken down into several different periods (shown in different colors on the charts of your marketing material). What do those different periods reflect and how relevant is the historic performance to the current fund set up.
William Härter: Asymmetric – Global Macro Fund was launched in 2012. The fund manager, Gunnar Pedersen’s personal track record goes back to 1998, and offers investors insight to returns also from previous employment. This is important from two perspectives. Firstly, the fund’s investment strategy is fully consistent with his previous strategy, and investors may use the historical data to assess the relation between returns and risk in the fund. Secondly, the 17 years of historical returns portrays a fund manager who has reliably generated absolute return over a long time, with only two years in the red.
HedgeNordic: Your fund is domiciled in Luxembourg as SICAV-SIF. Why did you choose this setup and how will you go about with the newly introduced AIFM directive?
William Härter: The fund targets European investors. Early checks among established investor relations indicated a strong vote in favor of “on-shore” European domicile. Credit Suisse offered a professional service of Custody and Fund Administration from Luxembourg, together with Prime Brokerage from London. Norwegian legislation adopted the AIFMD in July.
We are in the process of applying for AIFMD compliance, which we expect to reach by January 2015. Risk management and reporting procedures have been modified somewhat to comply with the AIFMD. Although the new regulation is comprehensive, we think the common “labeling” of the alternative funds industry will be positive for long haul, and that the “passporting” of marketing access into other EU countries will ease the access to investors.
HedgeNordic: There are several concerning factors and geo-political tensions in the markets currently, in Irak, Israel, Russia / Ukraine and Argentina’s default just to mention the most obvious. Can you disclose how you are currently positioned in the market?
William Härter: We promote transparency towards investors, but usually resist disclosing our current positioning publicly, for two good reasons. Obviously, the opportunity might go lost and the exit can become more costly if the current positioning is disclosed. Further, we believe that disclosure of positions could introduce behavioral biases, for instance the bias to stick with a position longer than what is beneficial.
HedgeNordic: What type of investor is the fund designed for and most beneficial?
William Härter: The fund suits “well informed” investors according to Luxembourg law, which requires a minimum investment is €125,000. Any investor who has the funds, and who understands the risk versus return, should find the fund beneficial as an element of a larger portfolio. This regards both professional and retail investors. An investment period of 5 years is advisable due to the expected volatility in the fund, which is lower than in stock markets but higher than in credit markets. Historical returns have been good, and correlation to other investments has been low over time. Our fund aims to offer “true” alpha, with no hidden beta exposure. This suggests, for instance, that an investor could benefit well from an investment in the fund, where the remaining portfolio is dominated by beta exposure.
HedgeNordic: In the final question we always ask our interviewee to share some market wisdom with us. What are your „famous last words?“
William Härter: Liquidity drives the prices of all assets. This has been observed both in times with abundant capital, and in times with credit crunch and liquidations. Liquidity is the most valued friend when entering an investment, but even more so when exiting. Liquidity is perhaps the most undervalued factor among most investors. We believe current market conditions offer low liquidity premiums. It remains to be seen whether the unprecedented monetary policy measures throughout the world can be unwound without negative consequences.