This material does not constitute investment advice and should not be viewed as a current or past recommendation or a solicitation of an offer to buy or sell any securities or to adopt any investment strategy. Q.M.S Advisors Av. de la Gare, 1 | 1003, Lausanne | CH tel: +41 (0)78 922 08 77 e-mail: [email protected]website: www.qmsadv.com qCIO Global Macro Hedge Fund Strategy November 2014
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qCIO Global Macro Hedge Fund Strategy - November 2014
qCIO seeks to exploit evolving economic conditions and the temporary mispricings that result among individual geographies and asset classes, opportunistically adjusting our investment views in response to the changing patterns of risk and reward in the markets.
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This material does not constitute investment advice and should not be viewed as a current orpast recommendation or a solicitation of an offer to buy or sell any securities or to adopt anyinvestment strategy.
Q.M.S AdvisorsAv. de la Gare, 1 | 1003, Lausanne | CH
views in response to the changing patterns of risk and
reward in the markets.
qCIO does this through close quantitative analysis of
global pricing trends, business cycles, volatility levels
and other macro-economic signals.
Q.M.S Advisors Av. de la Gare. 1 | 1003, Lausanne CH | tel: 078 922 08 77 | e-mail: [email protected] | website: www.qmsadv.comPage 3
Q.M.S Advisors Av. de la Gare. 1 | 1003, Lausanne CH | tel: 078 922 08 77 | e-mail: [email protected] | website: www.qmsadv.comPage 3
qCIO:
A Market Neutral Global Macro Fund
Bespoke Tactical Macro Investing
qCIO’s returns are driven not by the directional
movement of any one market but by exploiting short-
term mispricings among the markets themselves.
qCIO’s derived alpha tends to be highly efficient due to
the targeted balance of risk and return it achieves
across markets.
qCIO: a customizable strategy with a consistent return
per unit of risk.
This material does not constitute investment advice and should not be viewed as a current orpast recommendation or a solicitation of an offer to buy or sell any securities or to adopt anyinvestment strategy.
Quantitative Global Macro
Hedge Fund StrategyNovember 2014
Q.M.S Advisors Av. de la Gare. 1 | 1003, Lausanne CH | tel: 078 922 08 77 | e-mail: [email protected] | website: www.qmsadv.comPage 5
Table of Contents
Portfolio Objectives
Asset Classes and Market Coverage
Model Overview and Investment Process
Overview of Signals Across Investment Strategies
Derivation of Relative Return and Risk Expectations
Blending: Aggregation and Apportioning of Views
Portfolio Construction
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Historical simulation does not guarantee future performance of any individually managed account or fund.
Example:Objective
Excess Return over Cash 10 - 20%Volatility 5 - 10%Sharpe Ratio 2.0
Relative Tactical positions are formulated on an Absolute Return basis
To maximize risk-adjusted total return
Long or short positions may be taken in any asset classes
The portfolio may be implicitly leveraged
Trades are implemented with futures, forwards or option contracts
Stock-index futures, forwards or options on nine equity markets
10-year government bond futures, forwards or options in seven countries
Currency futures, forwards or options on seven currencies
Portfolio ObjectiveQuantitative Global Macro Strategy Focused On
Maximizing Risk-adjusted Returns
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A set of Models covering multiple Asset Classes and Markets
Markets currently included in the modeling process
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An quantitative global macro investment strategy built around five
independent sets of models with non-overlapping signals and return drivers
Model OverviewGlobal Macro Strategy: Approach
Cash VS Bond Bond VS Stock
Risk Premia Arbitrage
Intra-country Systems
Market Spreads
Inter-country Systems
FX
Bond VS Bond
Stock VS Stock
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Identification of
common signals for
all pairs
Derive direction
and confidence of
investment views
for all pairs
Portfolio construction:
Tactical trades
implemented via
futures contracts
Derive expected
returns for all
assets through
Bayesian blending
Signals Pairwise Views Blending Portfolio Construction
Within each sub-system Across all sub-systems Portfolio Implementation
Investment ProcessInvestment Procedure Outline
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All recommended strategies of the qCIO Model are based on expected excess returns derived from blending investment views of five independent sub-systems designed for different asset classes and markets; the weights of the views are determined by their relative statistical confidence as well as their dynamic correlations.
qCIO’s Blending
Model
Stock-Stock sub-system
Foreign Exch. sub-system
Bond-Bond sub-system
Cash-Bond sub-system
Bond-Stock sub-system
Expected Excess Returns and Risks
Strategies
Investment ProcessInvestment Procedure Outline
SignalsPairwise
Views
Portfolio
Constru.Blending
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Common Signals And ReturnsDiversification Across Signals Of Different Nature
Across Asset Classes Example (bond versus cash): 7 markets 7 iterations of the model
US Bonds vs. US cash, Japanese Bonds vs Japanese Cash, etc.
At each iteration, the dependent variable is defined as the excess return of bonds over
cash, hedged into USD
The explanatory variables correspond to the signal associated with the country under
consideration
A dynamic constant is included, corresponding to a risk premium
Within Asset Classes Example (equity versus equity): 9 markets: Consider each possible pair 36 iterations
Japan vs. US, EU vs. US, EU vs. JP, UK vs. Japan, etc.
The dependent variable is the excess returns of the two stock markets considered
(relative to cash), hedged into USD
The explanatory variables correspond to the difference in signals between 2 markets Example: Yield Gap for Japan vs. US = YG(USA)-YG(Japan)
No constant (premium) is included as there is no rationale as to why stock markets
should outperform one another
SignalsPairwise
Views
Portfolio
Constru.Blending
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Investment ProcessTypology of Signals
SignalsPairwise
Views
Portfolio
Constru.Blending
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Each pair of assets is considered in turn
The expected excess return of the pair of assets is the dependent
variable
Hindsight biases are minimized by assuming that all signals work
equally and moderately well at inception
The relative importance of each signal is determined by Bayesian
adaptive regression according to its consistency to performance
Direction and confidence of investment views are both expressed
as expected relative return and standard error
Pairwise ViewsSequential Derivation of Direction and Confidence
of Investment Views for Each Sub-System
SignalsPairwise
Views
Portfolio
Constru.Blending
FX Sub-System: Current Signal Ranks (1 = Best)
USD JPY EUR GBP CHF CAD AUD
Risk-adjusted Carry 4 5 6 3 7 2 1
Yield Trend 5 1 6 7 2 4 3
Flows 3 1 7 6 4 2 5
Growth 4 1 6 7 3 5 2
GDP Revisions 4 4 4 4 4 4 4
Technicals 3.5 1 3.5 4.5 6 5 4.5
Composite 5 1 3 4 5 4 6
FX Sub-System: Last Week's Signal Ranks
USD JPY EUR GBP CHF CAD AUD
Risk-adjusted Carry 4 3 2 5 1 6 7
Yield Trend 2 4 7 6 5 3 1
Flows 3 1 7 6 4 2 5
Growth 2 3 5 7 6 4 1
GDP Revisions 4 4 4 4 4 4 4
Technicals 1.5 4.5 5 1.5 4.5 4 7
Composite 2 3 6 1 4 5 7
FX Sub-System: Signals' Weights
USD JPY EUR GBP CHF CAD AUD
Risk-adjusted Carry 18% 12% 12% 12% 12% 13% 16%
Yield Trend 12% 10% 8% 6% 10% 8% 5%
Flows 6% 7% 10% 10% 8% 10% 11%
Growth 8% 11% 5% 5% 7% 5% 5%
GDP Revisions 2% 5% 7% 7% 6% 8% 5%
Technicals 55% 54% 58% 60% 57% 56% 58%
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FX Signals’ Contribution By Type Signals’ Ranking By Current Relative Explanatory Power
SignalsPairwise
Views
Portfolio
Constru.Blending
Bond-Cash Sub-System: Signals on scale from -5 to +5
Ω the covariance of returns (based on historical data)
P the matrix of views
Σ the covariance of the views
τ a calibration factor (set to 0.02, no consensus on its value in the literature)
Limiting cases:
P=0: No views BL returns= Equilibrium returns (0)
Inv(Σ)→∞: No forecast error BL returns = Views
BlendingAggregation and Apportioning of Views
SignalsPairwise
Views
Portfolio
Constru.Blending
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The expected excess return of each asset is influenced by views in all five sub-systems. Some of these influences are not surprising:
The expected returns of stocks are heavily influenced by views in the stock-stock and stock-bond sub-systems
The expected returns of bonds are heavily influenced by views in the bond-bond and bond-cash sub-systems
The expected returns of currencies are heavily influenced by views in the FX sub-system
But because of correlation among assets, a sub-system can influence the expected return of assets that are not directly involved in its own views. For example:
The stock-stock sub-system is contributing to higher expected returns for all currencies against the US dollar. This is because the stock-stock sub-system expects the US stock market to out-perform European stock markets in currency-hedged terms, and this is associated with a weaker dollar.
SignalsPairwise
Views
Portfolio
Constru.Blending
Blending: Systems’ InterdependenceExcess Returns Are Derived From Every Sub-Systems
Sub-Systems' contributions to expected excess returns of stock markets over cash, % p.a.
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Portfolio BacktestsUnrestricted Systematic Global Macro Program
SignalsPairwise
Views
Portfolio
Constru.Blending
The unrestricted program is the most accurate reflection of the model’s views.
Where a benchmark is present, no short-selling or leverage is permitted.
Annual Alpha = 6.30%Tracking Error = 7.77%Information Ratio = 0.81
Realized Performance - 15 years
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qCIO® Global Macro and GTAA Strategies are global, multi asset class strategies, that seek to add alpha through advanced quantitative investment processes. Potential investment opportunities are identified via rigorous and disciplined approaches based on combinations of economic and financial factors.
Generally, investment managers assemble their portfolios based on their long-term views of the performance of a single asset class, usually employing a five-year investment horizon. This traditional approach doesn’t take into account short-term macro events that have the potential to move the market. While these events take place, the resulting mis-valuations provide the opportunity to capture short-term incremental returns that are complementary to the long-term holdings of a traditional portfolio.
Defining FeaturesqCIO® Systematic Global Macro Program
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Q.M.S Advisors Av. de la Gare. 1 | 1003, Lausanne CH | tel: 078 922 08 77 | e-mail: [email protected] | website: www.qmsadv.comPage 29
qCIO® seeks to capitalize on numerous sources of alpha by identifying the market’s constantly evolving economic conditions and taking long and short positions in global equity, bond, credit, commodity and currency futures markets.
qCIO® views these asset classes on a differential basis, and in accordance with an array of macro-economic events in a number of different geographic markets.
qCIO® seeks to generate absolute return that has insignificant to very low correlation to a portfolio’s traditional asset classes, and allow investors to add alpha to their portfolios by exploring short-term sources of return while broadening their investment opportunity set from domestic markets to global markets, and from a single asset class to multiple asset classes.
Defining FeaturesqCIO® Systematic Global Macro Program
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Diversification across signals
Relying on one type of strategy is likely to fail as a variety of signals drive returns and as their correlation with returns varies over time. In contrast, the qCIO® process analyse markets methodically and focuses on a wide array of market signals to identify opportunities.
These signals are grouped into five broad “investment themes”: equilibrium, value, price dynamics, growth, and risk/sentiment that are consistent with economic intuition and are retained on the basis of their predictive power.
In accordance with this analysis, opportunities for alpha can be grouped under two broad assumptions:
Shorter term momentum for the risk and sentiment indicators, and for price dynamics signals
Mean reversion for economic indicators (e.g. growth, valuation, and carry)
Altogether multiple market views and diverse signals are expected to indicate where any target market stands in relation to its fair value or in relation to other markets.
Defining FeaturesqCIO® Systematic Global Macro Program