Profound shifts in demand and market strategies for absolute return strategies over the past decade have been compounded by what Nomura recently termed a “quant winter” of underperformance for systematic strategies.
For many hedge fund managers, changing institutional demand has entailed greater transparency as well a pressure on fees as investors have shifted to low-cost beta, enhanced factor-based strategies or illiquid direct investments.
The response of Aspect Capital, founded in 1997 by CEO Anthony Todd and research director Martin Lueck, to this landscape has involved an internal ‘diversification strategy’ away from its flagship fund, the systematic trend-following Aspect Diversified strategy, which has a track record dating to 1998.
Faced with lower overall income in the past five years, Aspect’s diversification strategy, has involved generating alternative income streams from new programmes and reducing the cost base. This has been achieved by recruiting staff, seeding new strategies and restructuring key roles.
The strategy has involved considerable investment and the company ran operating losses of £9.8m (€11.6m) in 2018 and £12.3m in 2017. Income stabilised in 2018 at £38.5m, as against £38.1m in the previous year, having reduced from just under £110m in 2015.
According to the company, the strategy involves “a broadening to the company’s range of different and customisable solutions in order to meet investors’ diversification needs, and to build an even more robust business”.
As Todd puts it, two key catalysts for change were clients’ need for deeper relationships with their managers across programmes and customised solutions rather than just off-the-shelf programmes.
Todd and Lueck also see demand from consultants for so-called ‘crisis-risk’ offset strategies, combining medium-term trend following with diversified risk premia, systematic global macro and ultra-long duration bonds.
The return profile of the Aspect Diversified strategy, which Todd describes as “episodic” was undoubtedly also a reason for the change in approach. Recent years have been no different: calendar year performance for 2019 was +20.09%, compared with -14.62% in 2018 and 5.0% the year before. The more recent Systematic Global Macro strategy returned -1.93% in 2019 and +14.28% in 2018.
In fact, the Diversified strategy had itself been subject to a process of gradual adaptation since the early 2000s to become 80% trend-following and 20% complementary strategies, recognising the volatility of pure trend-following and its return profile.
As they did this, Todd and Lueck realised that the building blocks of the complementary strategies could serve as the foundations for different programmes.
Lueck explains: “So with our trend models, if we pointed them at harder-to-access markets that are typically traded in CTA portfolios, this added another string to our bow and another paragraph to the conversation with clients.”
Embarking on what Todd describes as a “deep and highly systematic search” the firm hired consultants to identify managers meeting the right requirements in the systematic arena. As Lueck adds: “We explicitly realised that we had to bring in some external skills where we might not have all of the expertise in house.”
The first real action in Aspect’s diversification strategy took place in 2014 when a team was recruited from London-based Capula Investment Management, where they had developed a short-term trading programme. This was leveraged onto Aspect’s systems, integrated where appropriate, and became the Tactical Opportunities strategy, launched in 2015.
In 2016, a systematic global macro team was recruited. That team also ran a dynamic currency overlay strategy, effectively adding two additional strings to Aspect’s bow. Further additions included quant equity and volatility options trading.
Lueck comments: “Over the last 22-23 years, we have built a very strong culture, a very strong set of values. Making sure that any individual team or business we brought into the company shared those values actually was very important to us.”
Aspect has stuck to its knitting, avoiding any temptation to stray into the discretionary area: “Our expertise, our experience, our track record is in the systematic area; that is an area we understand well,” as Todd puts it.
Broadening the number of strategies has also added depth to Aspect’s research capabilities. The research team of about 30 is run on a ‘hub and spoke’ basis, with a central core of expertise holding responsibility for building underling models and techniques, and ‘spokes’ for each individual team.
“What’s been interesting is getting new DNA in the building,” Lueck says, as shorter-term focused research seeking more transient imbalances, including using alternative data sources, has developed to complement established trend-following research identifying more persistent behavioural factors.
“Whereas our trend-following models are all somewhere between a one to three-month timescale, the systematic global macro team are looking slightly shorter term and more like a couple of weeks to six weeks with an average holding period of about a month.
Growing the research team has led to the challenge of creating something worth more than the sum of its parts. Lueck says: “As you bring in these new DNA groups and get them to work nicely together, what we haven’t done is build a siloed group of researchers who never talk to each other.
“We give them the space to retain their intellectual identity. But they all talk, so when one group, like the systematic global macro group, finds a new data series, they’ll talk to the other teams. That is where you get leverage of different people’s skill sets.”
Does Aspect’s diversification strategy have an end in sight? “We are very comfortable with the range of programmes we have, the major capabilities we’ve built,” Todd says, batting off questions about succession planning. “Right now we are not looking to actually add any further capabilities. In due course, might we? Yes, absolutely.
“Near-term focus is doing everything we possibly can to generate competitive track records in each of the underlying capabilities.”