Quant is what Asian institutions want: SinoPac

The Asia-focused quant fund of SinoPac AM is targeting institutional investors seeking vehicles with low market correlation.
Quant is what Asian institutions want: SinoPac

SinoPac Asset Management (Asia) says interest has perked up for its computer-driven quant fund, as investors increasingly seek out vehicles with low market correlation.

Its Asia-focused SinoPac Multi Strategy Quant Fund returned 36.4% in 2011. Nearly half of the yield was gained in August – one of the region's most volatile trading months last year – when it achieved its best-ever monthly return of 17%. In the year to May 31, the fund returned 5.1%.

SinoPac AM – a subsidiary of Taiwanese financial services firm SinoPac Financial Holdings – sees the fund’s strong recent returns as an opportunity to branch out to institutional investors. The strategy has $22 million in AUM, with an investor base mostly comprising Taiwanese high-net-worth individuals. 

Run out of Hong Kong, the fund actively traded throughout last year’s volatile conditions at a time when managers at many conventional hedge funds were inclined to hold on to cash until markets stabilised. SinoPac’s quant fund trades are automated, except for large trades, which are manually executed.

“Some investors that we’ve met say that we could be a good complement to their portfolios because of our low [market] correlation,” says Eddie Kir, director of institutional sales at SinoPac AM.

Commodity trading advisor (CTA) vehicles – a category which includes quant funds – have the lowest market correlation of all hedge fund strategies, Eurekahedge data shows. Long/short equity, which is the most prevalent strategy in Asia, has the greatest market correlation.  

Interestingly, there is correlation among individual CTAs, which industry observers attribute to the fact that some proprietary algorithms are not created from a blank slate, and instead share a common thread with peers.

UK-based Winton Capital Management, for example, was founded by David Harding, who had previously co-founded Man AHL, a fellow CTA fund manager. Similarly, there have been CTAs founded by former staff from Winton Capital and Man AHL.

“Quite frankly, a lot of the CTAs are highly correlated to each other,” says Kir.

The algorithmic trading strategy for the SinoPac fund was created by a team led by Gladys Lang, who holds a PhD in physics. It was used for an internal hedge fund launched in 2006 for Taiwanese investment bank KGI Securities.

In October 2009 it was spun out under the auspices of SinoPac AM, which offered Lang’s team a chance to run the strategy as a standalone hedge fund. Since then, it has returned 41%.

In recent months, family offices and fund of funds in Hong Kong and Singapore have expressed interest in the fund, along with Japanese institutions which have previously invested in CTAs, says Kir. While the fund is also being marketed in Europe, much of the fundraising efforts are targeted within Asia.

Asian investors are interested in SinoPac's regional focus and locally based team, as most CTAs available in the market are based in the US or Europe and have a global mandate, says Kir.  

About 60% of SinoPac's portfolio is in equity index futures, commodity futures and FX with trades primarily transacted in Hong Kong, Taiwan, South Korea, Japan and Australia. “We are also active in equity index futures in Europe, US commodity futures, and S&P and Nasdaq [constituents],” says Lang.

The 'multi-strategy' portion of the fund's name stems from the fact that it uses three different trading approaches: mean reversion (the theory that a fluctuating asset price will eventually move back to the average), market reaction (taking advantage of dissimilar market reactions to certain news items in different markets) and momentum (focusing on stocks that are moving significantly in one direction on high volume). Positions in the portfolio are usually unwound within one or two days.

The strategy can manage $100 million without adjustment to the models and could take more money if adjustments can be made, says Lang.

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