Yung-Shin Kung – Credit Suisse – Trend following in Managed Futures

Yung-Shin Kung is a managing director at Credit Suisse. We recently caught up with Yung, who will be speaking at our 4th Annual Liquid Alternative Strategies Summit (May 1 – NYC), as he explained their approach to trend following in the Managed Futures space.

JV Events Group: How do you differentiate your fund from other funds in the Managed Futures category?

Yung-Shin Kung: The Managed Futures category encompasses a range of systematic and discretionary investment strategies. In general, these strategies focus on trading liquid futures contracts. Our approach to Managed Futures is distinctive in three key respects:

1. Our team and the global resources of Credit Suisse Asset Management. Our group has been a pioneer in liquid alternative investing since the late 1990s when we launched our Credit Suisse Hedge Fund Indices. Our Managed Futures strategy, published as the Credit Suisse Managed Futures Liquid Index, was launched in 2011, and is used by several leading institutions as an investible benchmark for trend following. We have strong governance, including independent market and operational risk management, and a deep team of technologists dedicated to optimizing our systems infrastructure.

2. Our focus on pure trend following. We employ a systematic investment process which seeks to capture price trends across a diverse set of instruments, asset classes, and geographies using a broad spectrum of signal time horizons.

3. Our emphasis on cost management. We designed our Managed Futures program to focus on the most liquid and relevant segments of the futures market and to limit unnecessary trading with the objective of minimizing trading costs which can be quite substantial for many Managed Futures strategies. In addition, our Managed Futures strategy is offered at a much lower price point than traditional hedge funds (several of which the strategy has outperformed on a net performance basis) while preserving daily liquidity and a high level of transparency. We believe that careful cost management results in better outcomes for investors over the long-term.

JV Events Group: What dynamics are driving Managed Futures right now?

Yung-Shin Kung: The vast majority of performance within the Managed Futures category is attributable to trends – up or down – in the prices of bellwether instruments across major asset classes. Our program focuses on these trends which we believe are most relevant to investors from a portfolio diversification standpoint.

Recently, the market has been highly attentive to progress in policy normalization among developed market central banks and to the implications of fiscal legislation in the US and synchronous global economic growth on inflation and interest rates. Our Managed Futures program has been sensitive to the re-pricing of nominal interest rates and exchange rates, and to moves in benchmark equity and commodity prices. We believe that the path of economic data and interest rates will remain an important dynamic for our Managed Futures strategy for the foreseeable future.

In general, market regimes which feature trending asset prices are supportive for Managed Futures strategies, while those that produce trend reversals or sideways price trends tend to be the most challenging. Our Managed Futures strategy seeks to produce more consistent returns by allocating across a diverse range of asset classes, thereby reducing its dependence on stable price trends in any one instrument or asset class.

JV Events Group: How do Managed Futures complement traditional assets?

Yung-Shin Kung: Investors commonly allocate to Managed Futures strategies to improve the efficiency of their portfolios. In contrast to many other investment strategies, investment decisions in our Managed Futures strategy are not predicated on any assessment of asset valuation. Rather, our program evaluates instrument-level price trends over a spectrum of timescales to determine whether instruments are appreciating or depreciating and takes long or short exposures consistent with the belief that the direction of such price movements will persist.

There is a rich body of academic and practitioner literature demonstrating the existence of trends in asset prices. Explanations of what gives rise to trends generally draw on the work of behavioral economists, pointing to the effects of common cognitive biases- such as anchoring, confirmation biases, and herding – among investors in driving the evolution of asset prices. Institutional incentive structures and policies may also perpetuate trends.

Because our Managed Futures strategy employs a systematic investment process utilizing input data distinct from that used in most traditional investment strategies and because the program’s criteria for going long or short instruments is very different from most long-only strategies, its performance has generally had a low correlation to that of traditional assets such as stocks and bonds. In fact, Managed Futures strategies have historically generated relatively strong performance in some of the worst periods for risk assets such as equities, highlighting their potential value in complementing traditional asset holdings and improving portfolio diversification.

JV Events Group: Thanks Yung. We look forward to hearing more of your thoughts at the 4th Annual Liquid Alternative Strategies Summit May 1st in NYC.

James Velissaris – Infinity Q

James Velissaris is the Chief Investment Officer of Infinity Q and also serves as the portfolio manager for the Public Investments Portfolio of Wildcat Capital Management, which is David Bonderman’s family office. With the recent spike in volatility, we were grateful to sit down with James, who will be speaking at our 4th Annual Liquid Alternative Strategies Summit (May 1 – NYC), and hear his thoughts about the importance of understanding the difference between volatility strategies and yield enhancement strategies.

JV Events Group: What are the defining characteristics of your fund?

James Velissaris: Infinity Q combines analytics, research, and trading (ART) to manage its investment strategies. Our team analyzes 50 million data points across global asset classes using robust quantitative models and screens. The team uses extensive due diligence to research discretionary and systematic investment ideas that originate from this analysis and from the buy side, the sell side and academia. As a final step, we utilize our expertise in derivatives to optimize trade structuring for both systematic and discretionary strategies. Our “Quantamental” process combines the depth of private equity investing with the breadth of quantitative analysis. We believe that every year there are 10-15 extremely asymmetric opportunities across asset classes, and we utilize our breadth to uncover these opportunities, and our depth to research and execute them.

JV Events Group: Why should investors consider investing in a volatility fund?

James Velissaris: Volatility arbitrage strategies historically outperform when volatility is high due to an increase in relative value opportunities. As a result, volatility arbitrage strategies are uncorrelated with equity strategies, and potentially provide benefits during stressful market events.

It is important to differentiate volatility arbitrage strategies from the pseudo-volatility strategies that have become popular in recent years. Selling put options, put spreads or doing an iron condor is not a volatility strategy. These are yield enhancement strategies that are highly correlated to equity portfolios in the left tail.

JV Events Group: Is the recent spike in volatility a reversion to the mean or just a temporary blip?

James Velissaris: The market environment over the last 5 years has been characterized by high fragility. Due to the amount of central bank influence on asset prices, risk becomes compressed for a prolonged period of time, and sows the seeds for a short-term decline in risk assets and spike in volatility. We have experienced these episodes in June 2013, October 2014, December 2014, August/September 2015, January/February 2016 and now February 2018. The core reasons risk becomes compressed including accommodative and highly reactive central banks are still in place globally, albeit to lesser extent. As such, we believe risk will become compressed following this event and we will patiently wait for the next tantrum event.

JV Events Group: How does your fund fit into a broad-based portfolio?

James Velissaris: We designed our portfolio to have zero beta to the S&P 500 over a cycle and have greater than a 50% probability of generating positive performance during declines in the S&P 500. Historically, our strategy has experienced a beta to the S&P 500 of 0.07 and has generated an average gain of 1.01% in months the S&P 500 declined.

JV Events Group: Thanks James. We look forward to hearing more of your thoughts at the 4th Annual Liquid Alternative Strategies Summit May 1st in NYC.

Will Rhind – Founder/CEO of GraniteShares

Will Rhind is the Founder & CEO of GraniteShares. We recently sat down with Will, who will be speaking at our 4th Annual Liquid Alternative Strategies Summit (May 1 – NYC), as he shared with us his views on the diversification potential of a commodities allocation.

JV Events Group: How do you differentiate your strategy from others in the Commodities space?

Will Rhind: Graniteshares is a low cost provider of commodity ETFs. Graniteshares currently offers the lowest cost commodity ETFs with no K-1s*. Our 2 flagship broad commodity ETFs; COMB and COMG are benchmarked against the Bloomberg Commodity Index & S&P GSCI Index respectively. Graniteshares Gold Trust, BAR and Graniteshares Platinum Trust, PLTM track the spot prices of gold and platinum*. Graniteshares has an in-house portfolio management with over 35years years’ experience managing commodity type investments.

JV Events Group: Are we in the midst of a new Commodities super-cycle?

Will Rhind: The commodities market bottomed in early 2016 as measured by the Bloomberg Commodity index. Since then the market has entered a rebalancing phase where falling production and rising demand have lifted prices, returning the supply-demand balance to equilibrium. This is typically the last phase in the cycle before demand outweighs supply, reducing inventories and creating upward momentum in prices or in other words a new bull market

JV Events Group: What is the expected correlation of your fund to the broad equity and fixed income markets?

Will Rhind: Historical correlations for both broad commodities and gold to the equity or bond market are low. In the post crisis era, years of global quantitative easing and low growth skewed correlations for many asset classes, including commodities. However, with gradual normalization of economic conditions, correlations are generally back to historical norms, reinforcing the diversification potential of a commodities allocation.

JV Events Group: How does your fund fit into a broad-based portfolio?

Will Rhind: There are generally speaking, two reasons why people include an allocation to commodities as part of a diversified portfolio: to diversify the portfolio exposure from over concentration in stocks and bonds, or to help protect the portfolio against rising inflation. Whether you are minded one way or another, Graniteshares has a solution for your portfolio.

JV Events Group: Thanks Will. We look forward to hearing more of your thoughts at the 4th Annual Liquid Alternative Strategies Summit May 1st in NYC.

*Source, Bloomberg, Feb 27th. Graniteshares Bloomberg Commodity Broad Strategy No K-1 ETF (COMB), Graniteshares Gold Trust (BAR) & Graniteshares Platinum Trust (PLTM).

Paul Korngiebel – Boston Partners

Paul Korngiebel is the portfolio manager for the Boston Partners Emerging Markets Long/Short Fund. We recently caught up with Paul, who will be speaking at our 4th Annual Liquid Alternative Strategies Summit (May 1 – NYC), to hear his thoughts on what opportunities he sees in the Emerging Markets space.

JV Events Group: Why should investors consider investing in Emerging Market Long/Short?

Paul Korngiebel: For the past 15 years emerging market economies have experienced substantially higher growth than developed economies. This trend is expected to continue for the foreseeable future. Despite the attractive growth, volatility of returns keeps many investors away or under allocated to emerging markets. Boston Partners offers the Boston Partners Emerging Markets Long/Short Fund with the goal of allowing investors access to active, emerging markets returns with meaningfully reduced volatility. We do this by running a fully invested long portfolio with gross exposure of 90-100% and variable short exposure of 30-60%. This portfolio construct allows for two important things. One, it provides a framework that affords investors the prospect of matching emerging markets equity returns with less risk. Secondly, a long short portfolio allows for the full expression of active management in the most inefficient equity markets. Boston Partners seeks to maximize that expression by adding value on both the long and short side of the portfolio.

JV Events Group: Where is your portfolio currently allocated?

Paul Korngiebel: The Fund maintains approximately 150 long positions and 80 short positions with net exposure of approximately 65%, which is on the higher end of our expected net exposure range given what we view as very attractive valuations across emerging markets. On the long side, new names have come from the Technology, Consumer Discretionary, and Financials sectors. On the short side, new names have come from the Consumer Discretionary, Industrials, and Consumer Staples sectors. From a regional perspective, net exposure to India and South Korea has been on the rise while we decreased net exposure in South Africa and China.

The bulk of our long book continues to be down-in-the-mouth value stocks with improving momentum; the long book trades at 10X FY1 eps, roughly one turn lower than the MSCI EM Index, despite better growth prospects. South Korea has been overweight and particularly strong, especially after the election of a pro-reform, pro-minority shareholder government, an unusual and very positive turn of events in over twenty years of investing in South Korea. In markets experiencing dislocations – in the following examples, all driven by political upheaval – we were able to buy high-quality businesses with barriers to entry in Brazil (after bribery scandal number two), South Africa (post the sacking of the well-regarded, pro-m market finance minister) and, to a lesser extent, Turkey, (where authoritarian rule was extended after a national vote.) The valuations for the excellent businesses we track were – and some still are — unusually depressed. We are also overweight a number of Chinese and Korean technological leaders whose platforms are expanding their lead over competitors, both in hardware and in internet, because they exhibit excellent fundamentals and momentum and, we believe, still have reasonable valuations relative to their total addressable markets. Perversely, in the case of the Chinese names, regulatory restrictions on monopoly positions seem limited because of the desire for state-control of the internet and the rule of law is limited. In Korea, certain listings of the Samsung empire remain very cheap.

We are underweight a raft of Chinese, Hong Kong and Taiwanese companies with questionable accounting and capital allocation practices (bad fundamentals and usually bad momentum, as well). We are also short many companies globally whose businesses are likely unsustainable as technology advances, infrastructure improves and regulators evolve, with particular examples in retail, consumer discretionary and industrials, as these tend to exhibit poor momentum and still have excessive valuations.

JV Events Group: How do you think about and manage risk in your portfolio?

Paul Korngiebel:
 Boston Partners defines risk as permanent loss of principal. The most effective ways to manage this risk is by having a diversified portfolio, a value oriented process which builds in a margin of safety, and a well-defined sell/cover discipline. Additionally, we use small position sizing and diversification to help manage the asymmetrical risk of the short portfolio.

JV Events Group: How does your fund fit into a broad-based portfolio?

Paul Korngiebel: Boston Partners Emerging Market Long/Short fits well within in a diversified portfolio that seeks growth. The improved volatility profile of EM Long/Short versus EM long-only exposure makes the strategy suitable as standalone EM exposure for investors concerned about EM volatility or ideal as a complement to EM long only exposure.

JV Events Group: Thanks Paul. We look forward to hearing more of your thoughts at the 4th Annual Liquid Alternative Strategies Summit May 1st in NYC.