Interview: Oliver Prock – Salus Alpha
Nov 20, 2014,
|
Mr. Oliver Prock, Founder, CEO & CIO of Salus Alpha |
Stockholm
(HedgeNordic) – Founded in 2001, Swiss based Salus Alpha was an early
adopter in terms of offering hedge funds in a UCITS compliant format.
Thanks to their UCITS wrappers, Salus was brought into the Swedish premium
pension system PPM in 2009 as one of only a very few hedge fund companies.
The company´s flagship strategy, Salus Alpha Directional Markets (DMX), is
a Managed Futures strategy that has been trading live since 2003 with
highly competitive performance numbers for its niche. HedgeNordic took
the opportunity to let Oliver Prock, the founder of Salus Alpha
explain the strategy in more detail. And here is what he had to say:
HedgeNordic: What
is the current AuM of the strategy, how much is in the fund/managed accounts?
What is the split between institutional and retail investments?
Oliver
Prock: We currently have a strategy AUM of $250million of
which around $50million is in the UCITS fund. The balance is split between
single managed accounts and investors who have come in via the DB Select platform.
We are pretty evenly split between institutional and retail investors although
we are proud of the infrastructure that we have in place that has been found
more than satisfactory by the most sophisticated institutional investors. In
addition, our regulated UCITS fund continues to pave the way in the face of
ever tightening regulation in the CTA space.
HedgeNordic: What
fees are charged on the fund level? (If differences in fees charged for
different share classes kindly mention these)
Oliver
Prock: Our fee structure is very simple. For single
managed account investors and investors via DB Select they are 1.25/20. Fees
for investors into the UCITS fund are 2.25%.
The
DMX strategy is described as “adaptive” going from trend to countertrend and
short-term to more longer term depending on your forecasting. In what periods
do you expect the strategy to over/underperform a more traditional trend
following strategy?
Being
“adaptive” means that we have demonstrated over our 11 year track record that
we outperform a traditional trend follower in almost every market environment.
2008 was a great year for most traditional trend followers, as it was for us
and we returned 63% net to our investors. In 2009 when most trend
followers gave back a large portion of their returns earned in 2008, we ended
the year again in positive territory, thereby demonstrating how we successfully
protect capital during periods that are otherwise unfavourable to traditional
trend followers. This we would say would be an important differentiator between
how we behave and how most other CTAs behave. A traditional trend follower
looks for trends and it is then that it makes it’s returns. When there are no
trends it will often lose money, hoping to make up these losses when trends
return. Directional Markets on the other hand also enjoys trending markets but
when the market is trading sideways or is “whipsawing” our strategy
is behaving in a contrarian fashion, reducing exposure, and we continue to
generate returns.
HedgeNordic: How
do you exlpain your outperformance in 2004?
Oliver
Prock: I guess the answer is in the adaptive style
being able to trend follow and being able to be contrarian
HedgeNordic: You
have been trading the strategy since 2003, has the system undergone any
significant changes over time and if so what are these changes?
Oliver
Prock: Since 2003 the strategy itself has remained
largely unchanged. We have added some markets but the strategy has stayed true
to its design, being able to adapt to different market environments. Before
2011, we would have said that there was no market environment that we could not
handle. Since 2011, as has been widely discussed in the CTA world, global
markets have structurally changed with the most important difference being the
politically motivated manipulated environment that has caused problems for many
systematic managers. We have dealt with these changes proactively; not by
changing our model but by changing the way we execute our trades in terms of
optimizing time to place an order to market. This “enhancement”, that we
implemented in 2012 has had a profound impact as it has enabled the model to
effectively deal with the new manipulated market environment. Our adaptive
strategy is now, once again able to apply itself “full throttle” to the new
environment. Being “adaptive”, we are not locked into pre-determined time
frames as many CTAs are. We use no technical analysis in our trading. We are a
statistical, price-forecasting model that alters its style of trading according
to the market conditions that it finds itself in.
HedgeNordic: The
performance of CTAs has been “flatish” ever since the record year in 2008. This
year however CTAs are once again in the spotlight with many strategies
outperforming the hedge fund industry as well as global equities. What do you
see as the explanation to the long period of non-performance and the sudden
pick up?
Oliver
Prock: The simple explanation for the “flattish”
period and the recent pick-up in performance of many CTAs is the recent
reduction in outside influences in the markets. QE is coming to an end.
Politicians are less involved in the markets and frankly, trends are being
allowed to run their course.
HedgeNordic: What
do you see as the unique characteristics with the DMX?
Oliver
Prock: Without wanting to repeat what I said
earlier, what makes us unique is that we broke away from the approach of using
technical analysis more than a decade ago. Our stratgey is based on
probabilities and uses statistics to forecast future prices. The accuracy of
those forecasts help determine our level of conviction to each of the 70-100
managed futures markets that we trade. The net result of this process is that
we cannot be described only as a long-term or short-term trend follower or as
contrarian. What makes us unique is that we are all of these but only when it
is appropriate to be so. We adapt our trading style depending on the
environment that we find in each market that we trade. Our portfolio is built
on a bottom-up basis so at any one time part of the portfolio could be trending
and part could be contrarian. We know of no other manager that can do this, and
we believe that our risk-adjusted returns are as a result superior to other
managers. Not only this, but our correlation to other managers tends to be very
low, due to the very different, yet proven way that we trade.
HedgeNordic: What
is currently the strength of your forecasting signals, what kind of market
environment is the models telling you lies ahead?
Oliver
Prock: We do not look further out than tomorrow’s
prices, but the strategy will quickly react to whatever environment it
encounters. It has done so now for eleven years and we see every reason for it
to continue to do so. This year so far, for example, we coped brilliantly with
what was widely considered a tricky market environment in the first six months.
We consistently put in good returns whilst others were finding it tough. We are
now +18% to end of October and are confident that the pattern will continue.
HedgeNordic: Looking
at the margin exposure, almost half of the risk is within equities, is that by
design or a reflection of current trends (ie is the graph a snapshot or a
longer term average?)
Oliver
Prock: Let me correct you here, please. Our
portfolio is always very diversified and will within certain risk management
constraints, go to where it sees, on a “probability” basis, the most likelihood
of being able to predict the future price of that market. Our presentation
contains a snapshot of a portfolio of Sector Margins divided by total margin.
Here is an example: You have three sectors A,B,C with 10% total margin and
3.33% margin each. So your cake will show 33% Sector A, B and C. Now you close
Sector C which is actually a risk reduction and now there is only 6.67% total
margin with 3.33% margin in Sector A and B. Your cake will now show 50% Sector
A and B looking like more Exposure to Sector A and Sector B but actually it
means you have less total risk in the portfolio.
In
reality, the portfolio is very active and can alter dramatically over a short
timeframe but generally will include a broad number of sectors, without special
emphasis on any one. If equities are strongly trending then we may put a higher
allocation to them but this is certainly not the current case. An integral part
of our inbuilt risk management is that returns are smoothed out by
diversification. Unlike some other managers we have not put special emphasis on
eg cash equities but our track record reflects the same model with the same
rules governing diversification since inception.
HedgeNordic: Looking
at past events, how quick is the system to close down
position/sector/portfolio? When was the portfolio last closed out?
Oliver
Prock: We have a control within the strategy that
will, on certain conditions, immediately close out positions, then sectors and
lastly the entire portfolio. Fukashima was a good example of this control
being put to work. 9/11 was another example. We have never had to liquidate the
entire portfolio in one go.
HedgeNordic: Finally,
do you have any market wisdom to share with us?
Oliver
Prock: Investors believe that CTA’s only made money
being long in bonds in the past twenty years. I do not think it is so simple
but next year could be an interesting year to test that statement. We think
that even though there will be no pressure on bonds prices since the FED will
instead of selling off the bonds from the balance sheet prefer to let them
mature, there will be some technical opportunity next year and we will very
likely see falling bonds prices. In any case it looks like we are probably
positioned more on contrarian side and not so much on trend side in 2015. I am
looking forward to talking to you about this in a year.