Rewards from systematic trading

“It takes a great deal of boldness and a great deal of caution to make a great fortune; and when you have got it, it requires 10 times as much wit to keep it” – Nathan Mayer Rothschild (1777-1836)


The Rothschild name is synonymous with the successful management of money. For more than 200 years the Rothschild business has been at the centre of the world’s financial markets, and to this day it remains under family control. For investors, this means the firm is neither driven by the short-term desires of shareholders nor distracted by the demands of financial analysts. “As a family-owned firm, we are able to take a long-term view, providing our clients with a service that is independent, stable and discreet,” says Baron Eric de Rothschild, Chairman, Private Banking and Trust.

The Rothschild family has retained its wealth by diversifying its investment interests; and hedge funds, which were introduced 60 years ago, formed and continue to form an important part of this diversification. In 1993 the Rothschild Group set up Guernsey-based Blackpoint Management Limited to focus exclusively on managing funds of hedge funds. Since its launch, the firm has grown steadily, and the Funds of Funds business (long only and alternative investments) represents more than $4.2bn managed by Blackpoint Management Ltd and Rothschild & Cie Gestion in Paris.

From the outset, Rothschild Blackpoint has had a diversified client base, which includes private clients, Rothschild partners and large institutions. As the business has expanded its client base has grown alongside, and now encompasses a broad range of investor types and far-reaching geographical scope. Approximately one third of invested money is with long term Rothschild clients, giving funds the stability needed to weather troubled economic conditions.

Award winners
In recent years, the Blackpoint funds have received industry recognition for their long-running superior performance and commitment to investors, winning awards in 2009 and 2010 from two separate industry bodies: Best Fund of Hedge Funds 10 Year Performance and Best High Net Worth/ Private Client Fund of Hedge Funds Provider.

Its Nemrod and Blackpoint Global Trading funds have been shortlisted for numerous awards over the years, and continue to be recognised by industry professionals and investors alike. In 2010, Nemrod received a highly recommended status from another industry body.

Launched in 1994, Blackpoint’s flagship multi-strategy fund of hedge funds, Nemrod Diversified Holdings, was nominated in 2011 for a World Finance award. This should come as little surprise, as the fund returned 10.05 percent last year, significantly outstripping the average fund of hedge fund returns of 5.42 percent. Over the past 15 years it has achieved an annual compound return for investors of 10.5 percent with an annualised volatility of 6.6 percent.

Performance on this scale is the product of a solid team and investment strategy. CIO Pierre de Croisset is a hedge fund pioneer, with over 20 years’ experience of investing in hedge funds. Indeed, the funds at Blackpoint have been managed by the same core team since inception, making the firm one of the most stable in the industry.

The investment team, based in Paris, New York and London, is supported by Rothschild’s global infrastructure, which provides dedicated marketing support, back office, compliance, IT infrastructure and legal services. In 2003, Blackpoint Management sponsored the launch of Blackpoint Advisory, a New York office specialising in hedge fund research, analysis and selection. Then, in 2004, the firm established an FSA-registered London subsidiary, Blackpoint Limited, to provide marketing and investor services to Blackpoint Management.

In hedge fund investing, experience matters – and Blackpoint’s investment philosophy, which has evolved over 17 years, is focused on achieving the greatest possible risk-adjusted returns with an emphasis on long term capital preservation and diversification. The team uses bottom-up manager selection and thorough research of investments based on qualitative analysis with quantitative and operational inputs. Allocations are made to funds whose managers are flexible and can adapt to different market environments. Capital is rarely allocated to thematic or sector specialists, helping to avoid overconcentration of the portfolio, and ensure a smoother, more consistent return profile.

The Blackpoint team is constantly on the lookout for profitable ideas. “At times, market conditions create unique opportunities to find asymmetric trading opportunities – such as shorting the technology bubble in 2000, or shorting sub-prime credit in 2007,” says Pierre de Croisset. “Participating in these trades through superior manager selections is essential to outperforming markets generally and our peers. We have consistently been able to identify some of the world’s best performing hedge funds throughout our long history.”

The team has maintained a commitment to macro and systematic hedge funds, having held these strategies in the flagship Nemrod portfolio since inception in 1993 (today they compose 46 percent of Nemrod’s portfolio). In January 2005, Blackpoint Management launched Blackpoint Global Trading (BGT), a specialist fund of hedge funds, which is the winner of the award for Best Specialist Fund of Hedge Funds, Europe 2011, in the 2011 inaugural World Finance Hedge Fund Awards.

With over $110m of assets under management, BGT combines pure systematic hedge funds with global macro managers (who have a more discretionary trading style), adding an opportunistic component to hedge tail risk. This focus aims to deliver returns that are less correlated to equity and bond markets, while blending the managers to reduce volatility. BGT has achieved this aim, with average annual returns since inception of 7.96 percent, and volatility of 5.45 percent. BGT has a correlation since inception of -0.02 to global bond markets and of 0.59 to the MSCI World index.

The managers’ extensive experience with these strategies has resulted in a well diversified portfolio, which breaks away from the pack by avoiding the ubiquitous longer-term trend followers and instead seeking less obvious CTA candidates, such as short and medium term trend followers.

The BGT fund managers are enthusiastic about the future for systematic investing as part of a balanced fund, pointing out that systematic strategies have evolved from a universe populated by simple trend followers to a heterogeneous marketplace with a high degree of diversification in style, strategy and instruments traded. Systematic managers are able to exploit investment opportunities through their ability to trade a broad range of asset classes, and their agnosticism for market direction.

 Systematic funds clearly state their risk management and volatility parameters, unlike many discretionary funds, and their models are rule-based, which removes the influence of human emotion and bias on investment decisions. For example, in 2010, the BGT systematic manager book benefited from trends and avoided some of the pitfalls of discretionary trading, which hurt macro funds that same year.

Future challenges
Rothschild Blackpoint predicts that global imbalances are likely to persist for an extended period of time. The risk of policy error is and will remain elevated and the recent trend of divergent views among countries is likely to continue as unique economic circumstances, not to mention local politics, result in varied policy.

“Our outlook is for a more precarious environment, with elevated levels of volatility,” says Diego Fluxa, senior portfolio manager. “We anticipate that macro forces will be the primary determinant of asset prices for the foreseeable future. It is becoming increasingly important for a money manager to have a solid grasp on the global macro forces that are becoming more significant drivers of localised markets and securities. We believe that a more gradual elevation in volatility will benefit systematic managers. However it is important to note that the commonly held belief that systematic managers are long volatility is mistaken; it would be more accurate to say that systematic managers are ‘volatility friendly.’”

Lower correlation in down-markets and higher volatility periods ensures better capital preservation in comparison to most other strategies. A diversified portfolio of hedge funds is well-equipped to capture the upside in risk assets while providing a reasonable protection against volatility and dislocating events.