Strong returns have been a hallmark of Fort’s business over the years, even in today’s choppy financial waters. The steady approach appears to be paying off
Running a successful hedge fund for the best part of two decades requires a clear strategy, which is something that US-based firm Fort has striven for since its launch in 1993. Consistently posting double-digit returns since its inception, the firm has also proven itself to be relatively immune to the troubles other hedge fund groups have encountered as a result of the last few years of economic turmoil.
As a Commodity Trading Advisor (CTA), Fort operates two funds, the Global Diversified Fund and the Contrarian Fund, each with contrasting strategies. On average, the Diversified Fund has delivered around 18 percent returns each year since launching in 1993, while the Contrarian fund has seen 14 percent during the 10 years it’s been in operation.
Co-Founders Yves Balcer and Sanjiv Kumar talked to World Finance about how they developed their business, why it – and their funds – have succeeded, and how and what the industry faces in the future.
You started the business with the Diversified Fund. How have you formulated the strategy that has resulted in its success?
Yves Balcer: We follow a very systematic, disciplined strategy. It’s been based on statistical methods that we believe are reliable and simple. We have built a learning mechanism into our statistical approach. Our model adapts itself to the circumstances as time passes, and we try not to second-guess it.
This takes away the emotional aspect of investing. The systems keep adjusting every day whether we are up or down. Many managers make major adjustments to their models when there are extremes. That’s absolutely the worst time to do it. I think that’s what has helped us over the years.
Sanjiv Kumar: A lot of people build strategies and they fall apart. As a result, people have a certain scepticism about systematic strategies and rightfully so. We think that there are two approaches that have been successful. The first approach, which is the dominant approach in the industry and probably was propagated by the most successful manager, Renaissance (Technologies), is that you build a quasi-university and you get a lot of these people to keep generating new ideas all the time. We’ve taken a different approach. We develop simple ideas, but with sophisticated statistics around it. Once that idea is in place, we let it run.
We think that the reason statistically robust systematic strategies make money is that human behaviour is inherently flawed when it comes to investment decision making. People consistently make the wrong choices most of the time. People are driven by emotions such as fear and greed. Money has a very powerful effect on people. Our systematic strategies try to exploit this persistent human weakness.
The Diversified Fund has averaged 18 percent growth per year since launching in 1993. What are its key characteristics?
YB: From 1993 to 2002, the fund consisted essentially of one strategy with trend following, which is still the most prevalent strategy in the field. In 2002 we added a trend anticipation strategy and added short-term term strategy in 2009.
SK: The concept of Diversified is that as we find new strategies, we’ll add them to Diversified. It’s a fund which reflects everything we do. We believe that a portfolio of simple and different but statistically robust strategies in the long run is a better approach because you’re looking at the market in different ways.
What was the thinking behind the Contrarian Fund, and how is it different to the Diversified Fund?
SK: When we started in 1993 we started with what everybody does, which is the trend-following strategy. When launching the Contrarian Fund, we said, ‘Is there something we can develop which is different from what we have already?’
There’s no point trying to have something that’s marginally different. So in 2002 we started a different approach, which is also trying to make money on trends, but instead being more of a trend anticipator. The Contrarian strategy is unique vis-à-vis what the other managers are doing. It’s trying to make money more in the first two-thirds of a trend, whereas trend following is aimed more at making money in the last two-thirds of a trend. It’s not that one makes more money than the other, it’s just that they make it slightly differently.
YB: The idea is when the market is moving up, you go the other way; conceptually it’s very appealing but execution wise it’s extremely difficult and very few people do it. People do it in a very short-term horizon, but few do it in our kind of way. You have the trend follower, who tends to be more or less in the two to three month horizon, sometimes a little longer. You have the short-term trader, who tends to be under two weeks. The Contrarian is roughly around a month. It seems appealing that we are in a different space.
The only difference is that, in general, because you are going against the market, the liquidity of the market is maybe a little less important. Generally, the people who are invested in the Contrarian tend to be more professional, as they are already invested in trend-type strategies with other managers.
The industry has gone through a difficult period recently. What challenges do you see for in the coming years?
SK: I think we are in what Keynes described as a liquidity trap, where central banks provide money and the people seem to have an insatiable appetite for locking up that money. No inflation happens and nothing happens. So we’ve had a huge compression in rates and, at some point, we will go to a scenario where compression in rates will stay the way it is, but some of the weaker credits will have to default. This will put enormous strains on the global financial system. Alternatively, if somehow growth comes back, then you’re probably going to have a significant rise in rates. We are slowly moving, more and more, to a scenario where some big events are likely to happen. It may be a year; it may be three years from now. We’ve been able to navigate the current environment better than our peers, but you always worry that the storm is just around the corner.
Do you think the regulatory environment is going to change significantly?
SK: If the situation gets worse, let’s say the major countries are not able to prevent defaults in weak sovereign credits and thus banks/financials become more exposed, there will be more curbs on trading. Governments don’t have too much sympathy for traders, and maybe rightfully so. No politician is going to lose sleep over curbs in trading if that means protecting their jobs.
What does Fort have planned for the future, and how do you expect to develop the
SK: There have been tremendous advances in technology and so we are looking at some of those areas to be more appealing to institutions, without having 50 people on our staff. The challenge for us is to try to use technology as much as possible. Our goal is not necessarily to be the next superstar or be the biggest in the business; we would like to reach $1bn in assets under management.
What attributes set Fort apart from its competitors in the industry?
YB: We are steady; we’ve been steady for a long time. Most people have not made money in recent years, and somehow we’ve managed to make money. As a result, we stick out like a sore thumb, which we did not before. Prior to 2008, there were plenty of managers generating good returns. In the past few years, the field has thinned down.