Monsoon Capital brings model-driven Asian strategy to Europe

US systematic manager Monsoon Capital has been offering its model-driven Asian systematic trading hedge fund strategy to European investors by private placement, and has recently opened a Ucits variant to external investors.

Open since October, the Ireland-based version now has about $12m, out of $56m in the whole strategy.

The $310m manager hopes to passport this Ucits IV compliant strategy into other European countries during this year.

Monsoon founder Gautam Prakash (pictured) notes his firm’s systematic approach offers investors something they may not see in discretionary managers in the region: net short positioning.

“From experience of watching trades and portfolio managers in Asia for seven years, you can see discretionary trading strategies will not go net short.”
He says in the long-term, Asia and its markets will grow. “But it will not be in a straight line”.

Many of the region’s discretionary hedge fund managers seem to believe the line will indeed by straight – or at least just upwards – and therefore are more highly correlated to markets – including when they fall.

In 2008, when global shares lost about 43%, Asia ex-Japan hedge funds fell 33.5% according to Hedge Fund Research. Last year they fell 17.4%.

Last year Monsoon’s core strategy made 36% net, while the MSCI Asia-Pacific Index fell 15%.

Prakash says: “Hedge funds should provide uncorrelated alpha, but many have provided correlated beta instead. That is okay when beta is strong – 2006 or 2007, but we have moved into an era when markets are not just going up.”

Monsoon’s core strategy made 42% net annualised, with 22% volatility, since launching 14 months ago. The Ucits version runs with one quarter the exposures of the core strategy, and Prakash says it could therefore make 10% to 12% on 5% to 6% volatility.

Over the same period, the MSCI All Country Asia-Pacific Index showed 19% volatility a year, and made an annualised net loss of 7.9%.

Monsoon’s core strategy therefore has negative correlation to Asian equities, and a 0.1 correlation to computer-driven hedge funds, sometimes called CTAs.
It is wholly automated.

“We are trying in Asia to take advantage of the trends and volatility you see there, by using managed futures or systematic strategies. There are no fundamental factors, we aim to keep the human emotional element out of the process.”

Prakash said Monsoon’s short-term trend following strategy would profit when markets rise, and when they fall, but would struggle in markets stuck in a 3% to 5% range.

The Ucits fund can be from 100% net short to 100% net long with gross exposure capped at 100% – so no leverage – and can move from one extreme to the other inside two trading days.

Prakash says daily liquidity of the indices it trades is between $85bn and $90bn, and the minimum daily turnover of index-futures of the near-month must be $500m in order to be part of the strategy’s tradable universe.

“We have to make sure we have a liquid portfolio, as we want to be able to liquidate the entire portfolio in a day. We can be nimble, and get out if we have to.”

Monsoon’s strategy uses 12 models to trade near-month futures on 10 equity indices in eight countries. The average holding period is nine days.

Its chosen markets are Taiwan and Japan (two indices each), South Korea, India, Hong Kong, China (traded via a Hong Kong-based index of onshore companies), Singapore and Australia.

Monsoon also has an India long-only small cap strategy, and Indian private equity real estate fund and an Indian systematic hedge strategy.

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