MANAGING MONEY
Analysing commodities
trends is just one Aspect
of Capital success
Aspect Capital is best known for its
commodities hedge funds. While
this sector is a central pillar of the
firm’s trading strategy, there are
other strings to the Aspect bow, as
Solomon Teague discovered
The commodities trading firm had two of the
hedge fund industry’s three most famous initials.
While Aspect Capital was established by the ‘A’
and ‘L’ of the AHL hedge fund programme – now
the pride and joy of Man Group – the London
systematic trading manager has added many
other luminaries to these two founders.
To Michael Adam and Martin Lueck was
added Anthony Todd, Aspect Capital’s third cofounder, and Eugene Lambert.
Aspect’s first fund was Aspect Diversified.
The systematic trend-follower is still the firm’s
flagship product, and its success lies not just in
its algorithmic trading system, says Todd, but
also in the company’s dedication to improving
the efficiency of its operation.
Aspect’s raison d’être is efficiency and anonymity in the market. While many of its competitors in the markets it trades are busy looking
for cheap securities, researching intrinsic value
and second-guessing the market, Aspect’s 52person research team are more concerned with
analysing the firm’s own technology systems,
searching for potential improvements in all areas
of its operations.
EFFICIENCY
“We’re always thinking about ways to exploit
market behaviour more efficiently,” explains
Todd. “It’s almost like any other industry,
whether you’re in chemical industry, the pharmaceuticals industry or the computer industry: you
can deliver a competitive advantage through efficient investment in R&D.”
With about 65 projects planned or currently
underway, the research department’s aim is to
save the company money in areas from reducing
26 | HEDGE FUNDS REVIEW | September 2005
Anthony Todd
Eugene Lambert
trading costs to spotting new relationships
between assets and improving the algorithms to
reflect these.
Todd fondly refers to the team as “probably
one of the largest R&D teams of any hedge fund
in Europe.”
The R&D department’s work focuses on
two areas: ‘foundation research’ is long-term
research, conducted over a period of months to
years, looking for big breakthroughs in the business but with an uncertain outcome.
At the other end of the spectrum, its attention
centres on delivering small incremental improvements to the business: less sexy, but with a higher
probability of success.
“One improvement we are making right now
includes better deployment of electronic trading
platforms to reduce our transaction costs, to
reduce our slippage costs,” Todd says. “My confidence in our ability to do that is incredibly high
– almost 100%. And the impact of doing that is
translated immediately into improved performance. Now we’re looking at how we roll our contracts, there’s work we can do there to improve
that process and that can add tens of basis points
to what we do with a very high probability of a
positive outcome,” he adds.
“If you have a range of different projects running simultaneously in a research environment,
you have to accept some will work out and some
won’t, but if you have the high-probability ones
running alongside the longer-term, less-certain
ones, that to me is a very competitive approach.”
The research team itself has recently been
the subject of an overhaul designed to improve
performance. “Until a year or two ago, we used
to run our research along product lines. In the
middle of last year, we changed it and started to
run our research on theme-based lines, because
there can be little pieces of work that cover all
our products. You lose that benefit if you look at
things from a product perspective,” says Todd.
“If you have a very efficient R&D, you have
significant resource,” he adds. “With the market
insight we have with Michael Adam and Martin
Lueck, I think we can deliver a significant competitive edge.”
ANONYMITY
Operating a company the size of Aspect poses
its own challenges. With approximately $2.6bn
assets under management, $1.8bn of this in its
Diversified Fund, it is a significant player in
markets it trades, yet anonymity is crucial to its
competitiveness.
“The type of investment approach we use is
called an analogue position function, in other
words a continuous position function, continually
adjusting its position in the market,” Todd elaborates. “We don’t let large orders loose into the
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MANAGING MONEY
market, but trickle small orders into the market
very efficiently, 24 hours a day with the aim of
having minimal visibility, being unpredictable
and incurring minimal transaction costs. Central
to this is that in the commodities sector – perhaps more than any other – you have to be very
conscious of liquidity. However, that approach
does enable us to have quite a significant allocation to commodities – and the commodities sector
is very diverse.”
Commodities make up 30% of Aspect’s overall
investments, and a 37% risk allocation of its
flagship Diversified Fund portfolio. However,
calling Aspect a ‘commodities house’ is not quite
accurate, Todd notes. The Diversified Fund is
also invested in bonds, with a 20% risk allocation, stock indices at 12%, currencies at 19% and
interest rates at 12%.
of other managed futures managers'. If you look
at others, the classic long-established ones are
long-term trend followers. At the other end of the
spectrum are short-term day traders. We are in
the responsive end, but not quite day traders: we
don’t change our positions in a matter of a few
days, it takes a matter of a few weeks.”
On average, Aspect holds positions for a few
months, unlike long-term trend followers for
whom it is many months or years. At the moment,
there is no significant difference between the
average time different assets are held, but recent
research on sector-specific models is exploring
the optimum time for holding different assets,
and could change that.
NOTHING IS CERTAIN
Earlier this year, almost all economists were forecasting a further decline in the dollar. There was
FOCUS ON RISK
practically unanimity that the dollar was going
“Our risk allocation is pretty static,” explains
to collapse. Guess what? It’s been one of the
Todd. “It changes as we add new markets, and
strongest performing currencies this year,” says
changes according to liquidity. Over the course
Todd. It explains his belief in the advantage of
of the last few months, we’ve identified a number
systematic trend-followers over and above macro
of new markets to add and developed our conplayers and other specialists who try to anticitinuous position function, hence we now have a
pate market moves.
bigger weighting to agriculturals and to the comIt’s not the only example. “I was recently
modities sector in general. But it doesn’t change
looking at a forecast on where the Chinese yuan
month by month.”
will be trading in a year’s time. There’s a 30%
While some argue the pitfalls of trading too
spread between the optimistic and pessimistic
wide a range of sectors, Aspect’s agnosticism
economists,” he continues. “We say the price is
regarding asset price fundamentals and intrinsic
the best determinant, and apply sophisticated
value means it can operate across a diverse range
statistical models to analyse the price and work
of asset classes without spreading itself too
out where it will head.”
thinly. In fact, there are some surprising relationThis is especially advantageous in times as
ships between assets that become evident when
uncertain and transitional as these. Many factors
you study a broad range of assets, Todd says,
are currently conspiring to cloud the judgement
another product of Aspect’s R&D work.
of economists, vying to dominate the actions of
“You have to monitor a wide range of markets
investors. The threat of terrorism, economic data
at different time frames 24 hours a day because
of various shades, the Chinese currency revaluayou don’t know when something will crop up,”
tion and the death of Saudi Arabia’s King Fahd
explains Todd. “There are markets where we
have all contributed to the uncertainty currently
have made no money for 10 years, but we are
endemic in the markets.
still in them. Who’s to say we won’t make a huge
Much was made, for example, of the doubt
amount of money in them over the next 10?”
surrounding the China currency revaluation and
Involvement in a broad range of assets maxthe impact it would have on the markets. The
imises the chance that when something trends,
answer, it turned out, was very little, certainly in
Aspect will be there to capitalise. Todd notes the
the short term. While everyone had their eyes on
reverse is also true: trading only in areas that
the dollar (which was expected to fall in wake of
have previously proved fruitful is no guarantee
the announcement) and oil prices, it was the bond
of success.
markets that were most lively in July.
“Think about where inflation was and where
“At the same time as that news came out, you
bond yields and short-term interest rates were
were getting strong economic news from both
in 1989 compared to where they are today. There
the US and Europe. At Greenspan’s congreshas been an unbelievable
sional testimony on
bull-market in bonds’
20 July, he immedishort-term interest rates
ately got up and spoke
“You have to monitor a wide range
over that period. Does
about his commitment
that mean that sector will
to increase interest
of
markets
at
different
time
frames
be more profitable for the
rates further,” Todd
next five to 10 years?”
explains.
24 hours a day because you don’t
With its attention
“Until that point,
always fixed on a broad
people thought he
know
when
something
will
crop
up”
range of markets, its
might moderate the
trading system analyses
pace of interest rate
ANTHONY TODD
price movements and
increases. That combirelationships, searching
nation of news drove
for trends. Its orders
bond yields higher and
reflect sophisticated interpretations of the meanhigher. Of all the trends that have emerged from the
ings of price movements.
last month, it’s really the bond one that has legs.”
“There’s a big difference between a market that
The equity markets have also been vibrant,
goes up in a straight line and then collapses, and
with Asian markets setting the standard. Todd
a market that gradually goes up and then gradusays both the Hang Seng and the KOSP have
ally down. Our systems will react in different
made impressive gains, from which Aspect has
ways to the two different moves,” Todd says. “Our
profited. “Asia always tends to be a geared play
systems are very responsive compared to those
on the world economy,” he notes.
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FUNDAMENTALS
Name of manager:
Full name of fund:
Address of manager:
Aspect Capital Ltd
Aspect Diversified
Nations House
103 Wigmore Street
London W1U 1QS
Phone contact for further information:
+44 (0)20 7170 9700
Launch date of fund:
December 1998
Present size of portfolio: $1671m including
segregated accounts
(as at end July 2005)
Is the fund open or closed to new investors:
Open
Target annualised return: Strong absolute
performance over
the medium term
Target annualised volatility:16%
Avge annualised volatility 17.9%
(as at end July 2005)
Geographic focus:
Global managed
futures
Administrator:
Bisys Hedge Fund
Services (Ireland) Ltd
Prime broker:
Fimat International
Banque SA
(UK Branch)
Auditor:
KPMG
Initial fee:
N/A
Management fee:
2%
Performance fee:
20%
Is there a high watermark for performance
fee?:
Yes
Is the fund listed:
Euro class is
Dublin-listed
Domicile:
Offshore, Cayman
Islands
Share classes/currencies: US dollar, euro, yen,
Australian dollar
Minimum investment:
$100,000
Lock-in period:
N/A
Redemption period:
Monthly on 14
business days’
written notice
Envisioned capacity before soft/hard close:
$8bn
Can the investment be accessed through
segregated account as well as existing
portfolio?
Yes, min. $10m
Strong trends in May and June delivered
Aspect returns of 9% over the two months,
mostly made in the bonds markets. It then lost
0.8% in July – a challenging environment, especially for trend-followers, which, by definition,
struggle when trends stop, until they have a
chance to adjust their positions to reflect new
realities.
Despite the difficulties in predicting what the
next trends will be, Todd is certain opportunities
will present themselves amid the cacophony of
world political and economic events. “It’s a powerful cocktail and it will power some interesting
trends for the rest of the year. But whatever
direction they will be, we will identify them and
make money for our clients.”
Any investment in Aspect Capital is speculative
and subject to the risk of loss as well as other
risk. This is a reprint of an article published in
Hedge Funds Review in September 2005
September 2005 | HEDGE FUNDS REVIEW | 27