FOUNDING FATHER Q&A
Research as Strategy Mainstay
Tim Wong, chief executive of AHL, provides insight into the performance of managed futures. He began his career doing statistical research in financial markets with AHL after finishing an engineering degree at Oxford University. He has developed systematic trading models at AHL for over 18 years, during which time he contributed to AHL becoming one of the world's largest and most successful managed futures managers, currently with $24.4 billion under management. AHL, part of Man Group, returned over 30% in its flagship Diversified program in 2008.
Mr. Wong sees AHL's research ethic and commitment to research as the key driver behind its success. This has resulted in Man Group, along with AHL, establishing a collaborative relationship with Oxford University through the creation of the Oxford-Man Institute of Quantitative Finance. AHL has a research laboratory located on the same premises as the Institute, with high performance computing and micro-structure modeling among the areas being researched. It is planned that this laboratory within Oxford University will play a key part in driving AHL's research efforts in 2009 and beyond.
Opalesque Futures Intelligence: How did you move into futures from engineering?
Tim Wong: I stumbled into managed futures quite by chance. My main interests have always been the sciences, and I originally wanted to become an engineer after I completed my degree. Having been brought up in Hong Kong I was mildly aware of the financial markets, but I never aimed to be the investment banker type. After I graduated I applied for a few financial positions alongside a number of engineering opportunities. I was lucky to have found AHL, which allowed me to combine my love of science with the study of the financial markets.
OFI: What's interesting about this market?
TW: Futures markets are often viewed as more complicated and risky than stock or bond markets. In my view, this is more due to the misuse of the inherent leverage of futures through margining and the unfamiliarity with managing short positions. Futures allow investors to express their bullish or bearish views of markets simply by going long or short, respectively. In addition, trading is carried out on a regulated exchange, which provides price transparency, centralized clearing and liquidity. Unlike equities or bonds there are no dividends or coupons, which is perfect for trading strategies based on forecasting market directions across a diverse pool of markets.
OFI: Why did AHL do so well in 2008, a very difficult year for almost all other investments?
TW: If you look at the performance of our Diversified fund in 2008, what you see is that all sectors traded contributed positively to performance. Energies were the stand-out performer, with long and then short oil positions later in the year driving returns. Currency trading was also extremely profitable, with long US dollar positions adding to performance in the final quarter.
While on face value this sounds good, it must be acknowledged that 2008 was an extremely challenging year for the financial markets. We saw volatility increase substantially throughout the course of the year, while at the same time counterparty exposure became a key focal point. Our robust and adaptive risk management systems, diverse trading relationships and advanced electronic trading platform ensured that we were able to successfully navigate our way through the challenging year that was 2008.
“Since we began trading in 1987, AHL has continually researched and refined its trading systems in order to enhance its systematic trading approach”
OFI: Which markets offer promising trading opportunities this year?
TW: From my experience, one important thing that I have learnt is that it is difficult to predict which markets are going to perform over the next year, let alone over the following few months. If you look back at sector attribution of our Diversified program over the past five years, what you see is that markets and sectors do not perform consistently over time. For example, energy trading led performance in 2008 however in 2006 it actually generated a loss. By taking a highly diversified approach, by both sector and market, you have the potential to profit from trends developing in only a handful of markets.
Concentrating on the year ahead, economic uncertainty will continue to have a dominant impact on market performance, just like in 2008. Based on our past experience, we are confident that, given clear trends, AHL will continue to perform well. However, given the current high volatility environment, it must be emphasized that risk management will continue to play an important role in AHL's day-to-day operations.
OFI: What's the main advantage of managed futures over other investments?
TW: 2008 really highlighted the benefits of managed futures, especially as a complement to traditional investments or even other hedge fund strategies. With global equity markets falling 40% over the last calendar year, managed futures really proved that they can provide absolute returns with little or even negative correlation with the broader markets. This was not unique to the current credit crisis and history shows that managed futures have achieved this during other difficult equity market environments.
The highly diversified nature of managed futures portfolios is one of the primary factors explaining how managed futures have been able to deliver uncorrelated returns over time. For example, currencies, bonds, interest rates, stocks, metals and agricultural markets are all normally traded within a highly diversified managed futures portfolio.
Trading futures has a number of advantages, especially in the current uncertain climate. Their use allows managed futures managers to take advantage of both rising and falling markets, enabling managers to be flexible and react quickly to price moves. Another important feature is that futures are traded on highly regulated exchanges that offer transparent pricing and centralized clearing, which mitigates counterparty risk. Margining also results in managed futures being very cash efficient and therefore liquid, an extremely important characteristic given the illiquidity problems that other hedge fund styles are currently experiencing.
OFI: What's the main risk? How can it be reduced?
TW: For trend-followers, range-bound price activity or short-term reversals are market conditions that can have a negative impact on performance. While this can happen over the short term, over the longer term a decrease in power of the inefficiency exploited can pose a greater risk to managed futures managers. Since we began trading in 1987, AHL has continually researched and refined its trading systems in order to enhance its systematic trading approach and therefore counter these and other risks. Our emphasis on research and development, in particular the establishment of the Man Research Laboratory in Oxford, puts us in an even stronger position to manage these risks both now and in the future.