Facebook Twitter Instagram
    • About
    • Subscribe
    • Contact
    • Report Library
    • Manager Login
    Facebook Twitter LinkedIn RSS
    HedgeNordic
    • Home
    • Allocator Angle
    • Report Library
    • Nordic Hedge Award
      • Nominations 2021 Nordic Hedge Award
      • Rookie of the Year
      • Jury Board
      • Historic Winners
      • Statistics
    • Nordic Hedge Index
    • Webinars & Podcasts
    HedgeNordic

    When equity market neutral meets momentum

    Jonathan FurelidBy Jonathan Furelid02/06/2016No Comments
    Facebook Twitter LinkedIn Email

    Stockholm (HedgeNordic) – By combining an equity market dollar neutral portfolio with a directional overlay, Naqvi Van Ness Asset Management (NVAM) aims at capturing relative mispricings in the equity space while at the same time benefiting from the irrational behaviour that appears during distressed market conditions as behavioural aspects come into play.

    NVAM’s Strategy could be characterized as a hybrid betwen a market neutral long/short equity fund and a CTA. Using a systematic approach the strategy allocates 60 per cent of the risk to the equity book while holding 40 per cent in directional models exploiting investor biases. In describing the fund ́s approach, Ali Naqvi, co-founder and portfolio manager, uses a sailing analogy.

    “One could say that our long/short equity book is our sail while the directional book is the rudder, helping us manage direction when there is more uncertainty in the waters”

    Naqvi, previously a senior portfolio manager at Citibank, together with co-founder Albert Van Ness decided to launch the fund to US investors in 2008, based on their research into behavioural systematic models. They were joined in 2010 by their third partner Charles Dubois who brought 30 years of quantitative strategy design and testing skills to the firm. They were all of the strong belief that a number of biases were present in the market and that these biases could, if properly researched, be systematically tested and serve as an efficeint alpha-engine in a broader portfolio context.

    ”We look at fundamental factors through a quantitative lens. Some people call it a ”quantimental” process. Such as building multi-factor screens and well-known tecnical models for figuring out market direction. Those approaches are known to have predictive value. We have ”gene- spliced” them with our insights into investor biases. It has been our experience, and it is born out in our performance numbers that this approach enhances the alpha extraction on both the long and the short side”. Naqvi says.

    In the core long/short equity portfolio, NVAM looks for mispricings in a diversified universe of 2500 stocks, selecting around 100 stocks long and 100 stocks short. On the long side, the models look for companies with an attractive combination of free cash flow yield, growth and profitability.

    On the short side, the system targets companies that express mutiple signs of possible fundamental vulnerability incuding negative free cash flow, abnormal growth in inventories and excessive capital spending. According to Naqvi, the fact that the fund focuses on free cash flow rather than on earnings gives it an edge with regards to its stock selection capabilities.

    ”Even though it is well understood that free cash flow is a better and more information-rich way of investing in stocks, investors on average prefer to avoid the complexities. You hear a lot of people talk about free cash flow but actually being able to implement it and use it is a whole other matter”, Naqvi argues.

    Many of the behavioural biases exploited in the program are modeled in the directional overlay part of the strategy fund program. These models base their signals on a number of well- documented factors and are implemented in the US equity markets.

    ”We use four main factor groups in the directional overlay; technical, sentiment, seasonal and fundamental. Inherent in these factors are a number of repetitive biases that we systematically seek to exploit”, Naqvi explains.

    Among the behavioural biases that the models aim to extract alpha from are anchoring, ambiguity aversion and herding.

    ”Anchoring is related to levels in the markets that are often referred to by traders using technical inputs. The anchoring bias comes about as a result of investors having a tendency to get anchored to the price they buy the stock at. These are essentially just numbers that become very important to people even though they have no great relevance. Ambiguity aversion relates to the fact that investors tend to shy away from things they do not understand. Herding relates to a sentiment imbalance that is typically present when momentum dictates market action.”

    Screen shot 2016-06-02 at 21.27.39

    With regards to herding effects, the fund uses proprietary models that are derived from extensive research with the aim of identifying durations of sentiment imbalances.

    ”We have done exhaustive research into herding effects based on sentiment surveys with long histories and have developed insights regarding the duration of sentiment imbalances. These insights are integrated into our directional models”, Naqvi says.

    The sentiment-driven part of the portfolio has played an important part in its ability to generate competitive risk adjusted returns and serves as an important diversifier in times of turbulent equity markets such as those experienced in the first two months of 2016, according to Naqvi.

    ”The start of this year was difficult for many long/short equity funds as they tend to have a signficant long bias built into their models. The fact that we are dollar market neutral with a directional overlay has helped us in periods of strong risk aversion in the past and provided us with diversification this time around aound as well”.

    According to Naqvi, the strong results of the strategy are explained by the defensive positioning going into the year and the contribution from sentiment-driven models.

    ”We started the year rather defensively with a net exposure of around 15 per cent. The strategy returned approximately 1 per cent in January alone and the sentiment driven models generated buy signals by the end of the month which helped us outperform signficantly in March.

    In a forward looking statement, Naqvi says that the models remain upbeat about near-term equity market prospects. ”Looking ahead we see both moderate earnings and economic growth. The change in the “multiple” is, as always, uncertain. However, we do expect interest rates and inflation to remain relatively benign. Consequently, the bull market should remain intact.”

    ”Within this big picture, our indicators currently lean clearly to the favorable side. Fundamentally, the Fed is still accommodative, credit spreads have been narrowing and overall stresses and potential vulnerabilities in the financial system appears to relatively low. Even as the market has recovered there has not been an outbreak of enthusiasm. Separately, our measures of the “technical” environment indicate bull market conditions.”

    The NVAM Criteria Investment Partners International Limited fund has been notified in Sweden and is approved for distribution to professional clients as from March 2016.

    Picture: (c) Alvov-See-All—-shutterstock.com

    Share. Facebook Twitter LinkedIn Email
    Previous ArticleWhy every institutional portfolio needs exposure to managed futures
    Next Article Brummer Multi-Strategy: it´s starting to hurt
    Jonathan Furelid

    Jonathan Furelid is editor and hedge fund analyst at HedgeNordic. Having a background allocating institutional portfolios of systematic strategies at CTA-specialist RPM Risk & Portfolio Management, Mr. Furelid’s focus areas include sytematic macro and CTAs. Jonathan can be reached at: jonathan@hedgenordic.com

    Related Posts

    One Nordic Cross Hedge Fund is Liquidating

    St. Petri Readying Launch of Long-Only Fund

    CTAs Starting Summer on a High Note

    Add A Comment

    Leave A Reply Cancel Reply

    Time limit is exhausted. Please reload CAPTCHA.

    Most read today:
    • One Nordic Cross Hedge Fund is Liquidating
    • The Birth of Obligo’s Third Infra Fund
    • Head of Alts Jumps Ship to Join AP Pension
    • Nordic Hedge Award – Main
    • Lower no Longer: Cash & Carry in the Emissions Markets
    • Interview: Marcus Wahlberg, Elementa
    • In-Depth: Inflation Protection

    Ukraine, Supply-Chain Shortages and Soaring Prices – Accelerators of Sustainable Development

    18/05/2022

    New Theme: Real Income Destruction

    17/05/2022

    Blockification

    16/05/2022

    The Inflation Puzzle

    12/05/2022
    Promotion:
    Video: Manager Interviews
    https://www.youtube.com/watch?v=tni7dQvQrmo

    Subscribe to our newsletter

    HedgeNordic: Your Single Access Point to the Nordic Hedge Fund Industry!

    Check your inbox now to confirm your subscription.

    Most read articles this week:
    • One Nordic Cross Hedge Fund is Liquidating
    • Janus Henderson Onboards Danske Bank’s EMD Team
    • AIFM Group Adds Art to Suite of Offerings
    • St. Petri Readying Launch of Long-Only Fund
    • Head of Alts Jumps Ship to Join AP Pension
    • Procrastinated Risk is Knocking on the Door
    • Recent
    • NHX
    • In Depth

    The Birth of Obligo’s Third Infra Fund

    04/07/2022

    One Nordic Cross Hedge Fund is Liquidating

    30/06/2022

    St. Petri Readying Launch of Long-Only Fund

    29/06/2022

    AIFM Group Adds Art to Suite of Offerings

    29/06/2022

    Month in Review – May 2022

    22/06/2022

    Month in Review – April 2022

    12/05/2022

    Follow Your Favourite Hedge Fund

    11/05/2022

    Month in Review – March 2022

    13/04/2022

    Ukraine, Supply-Chain Shortages and Soaring Prices – Accelerators of Sustainable Development

    18/05/2022

    New Theme: Real Income Destruction

    17/05/2022

    Blockification

    16/05/2022

    The Inflation Puzzle

    12/05/2022
    Newsletter Subscription:
    Most Recent Posts:

    The Birth of Obligo’s Third Infra Fund

    04/07/2022

    One Nordic Cross Hedge Fund is Liquidating

    30/06/2022

    St. Petri Readying Launch of Long-Only Fund

    29/06/2022

    AIFM Group Adds Art to Suite of Offerings

    29/06/2022

    Head of Alts Jumps Ship to Join AP Pension

    28/06/2022
    Publisher

    Nordic Business Media AB
    Corporate No.: 556838-6170
    BOX 7285
    SE-103 89 Stockholm, Sweden

    VAT No.: SE-556838617001
    Tel.:+46 (0) 8 5333 8688
    Mob.: +46 (0) 7 06566688
    Email: info@hedgenordic.com

    STAY INFORMED

    HedgeNordic: Your Single Access Point to the Nordic Hedge Fund Industry!

    Subscribe to our newsletter:

    Check your inbox now to confirm your subscription.

    RSS Hedge Fund Job Digest
    • Assistant Fund Controller or Senior Associate 01/07/2022
    • Fund Accountant 01/07/2022
    • SQL Server DBA/Sybase ASE DBA 01/07/2022
    • Director of Business Development 01/07/2022
    • Principal Technical Architect 01/07/2022
    • Fund Accountant 01/07/2022
    • Associate - Investment and Operations 01/07/2022
    • Middle Office Associate 01/07/2022

    Copyright © 2022 Nordic Business Media AB

    © 2022 Nordic Business Media AB
    • About
    • Cookie Policy
    • Privacy Policy

    Type above and press Enter to search. Press Esc to cancel.

    We are using cookies to give you the best experience on our website.

    HedgeNordic
    Powered by  GDPR Cookie Compliance
    Privacy Overview

    This website uses cookies so that we can provide you with the best user experience possible. Cookie information is stored in your browser and performs functions such as recognising you when you return to our website and helping our team to understand which sections of the website you find most interesting and useful.

    Strictly Necessary Cookies

    Strictly Necessary Cookie should be enabled at all times so that we can save your preferences for cookie settings.

    If you disable this cookie, we will not be able to save your preferences. This means that every time you visit this website you will need to enable or disable cookies again.