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A-rated PM: investors need a reality check

A-rated PM: investors need a reality check

Investors in managed futures have had a lean time of late. Data from Citywire Discovery revealed that over the three years to the end of July 2017, the average manager in the sector returned just 1.8% in euro terms.

With that in mind, it’s no wonder that SEB’s Hans-Olov Bornemann, one of the sector’s successes, says managers need to get back to reality if they want to perform.

‘A managed futures manager needs to be able to understand reality as much as possible,’ he says.

Citywire A-rated Bornemann, who heads up SEB’s global quant capabilities, as well as managing several funds at the firm, said managers need to integrate this more grounded approach into their investment models.

‘Investors shouldn’t be phased by the past. For example, if you think about Goldman Sachs’ quant team, they started with a theoretical framework and tried to put that in place without fully understanding the market. If you do it that way you are starting with a theory and topping it up with reality.

‘However, reality needs to be your starting point and then you must try to build a model around it which is as consistent as possible. That is the secret to success.’

Bornemann has the numbers to back this up. Over the three years to the end of September 2017 he returned 9.16%, whereas the average manager lost 0.96% in euro terms. Bornemann says much of this outperformance is down to understanding how the market moves.

‘Our model makes money off trends, either upward- or downward-sloping, and the longer trends become, the more money we make.’

Bornemann says in 2014/2015, for example, trends were clear in a number of different asset classes such as equities, bonds and currencies.

‘This year trends in fixed income have been breaking up more frequently than normal. Also on the currency side, there have been more reversals than expected.

‘We tend to lose money in every market reversal because we are always following the market’s main trajectory. But this loss is compensated by the fact that we gain more when any trend becomes extended.’

Shape shifting

Bornemann says recent shifts in US growth have been particularly challenging.

‘Growth in the US has been shifting from being initially bullish when Trump took over, to becoming more bearish – then becoming a bit more bullish again. When growth expectations were quite high when the fixed income market was taking a bit of a beating.

‘Our model turned negative on bonds and therefore it went short on the asset class. After a while, the growth rates were not coming through the way people expected and then they became bullish on bonds again, so our model resumed taking long positions.’

Bornemann says this oscillating market has highlighted difficulties within the currency sector.

‘At first, there were positive expectations about the US dollar and we made money being long on the currency but it turned out to be a bearish sentiment and we lost a bit. We then started to make money being short the dollar and more recently the greenback has been appreciating and it’s been fluctuating a bit too often back and forth.

‘That’s been hurting performance, it’s not a catastrophe, but we are not making any money.’ he says.

With these uncertainties in mind Bornemann says it’s hard to forecast when performance will come through.

‘It’s a challenging time for managed futures. If it was possible to time these sorts of products, then obviously we would build it into our model and make even more money.

‘It’s something that everybody would like to be able to do, but no one has cracked it. For that reason, it makes more sense to have these sorts of funds as a strategic allocation.’

Playing the long game

Equities have been trending much more than government bonds and currencies over the past 12 months, and Bornemann says the model has made money from this movement but not as much as he would like.

‘Since we don’t take as much exposure to equities as a typical balanced portfolio, we have not been able perform as strongly as we wanted over this period.

‘However, the fund is good at generating excess returns over time and simultaneously, has very low correlation compared to equities and bonds. When you look around at the potential universe there are very few funds that generate excess returns with such a low correlation versus equities,’ he says.

This article originally appeared in the November edition of Citywire Selector magazine.

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