Paris-based commodity trading advisor (CTA) KeyQuant SAS has put up impressive numbers in the less than three years it has been trading and has grown assets at an impressive clip as well. The medium- to long-term trend-following CTA has produced a compound annual return of 24.87% with a worst drawdown of 11.55% since launching in January 2010.
Perhaps more impressively, it has garnered $60 million under management in the solid but hard to crack — for an emerging manager — diversified trend-following space. But if you are one of those allocators who automatically turn the page when confronted by another emerging trend-follower, you may want to take a closer look at KeyQuant, because it obviously is doing something right — and different — judging from its solid if unspectacular performance, 9.1%, in the difficult environment for trend-followers in 2011.
The two principals, Robert Baguenault de Vieville and Raphaël Gelrubin, both worked at Man Fidex Ltd., a subsidiary of Man Investments, from 2004-2007, building quantitative models. Baguenault de Vieville was responsible for quantitative research and Gelrubin was responsible for risk management. They worked on building non-correlated models to complement Man’s AHL program and became friends and partners.
Their work at Man Fidex emboldened the two friends to build their own methodology to manage money. And though the Key Trends program is correctly identified as a trend-following approach, it is pretty unique as its performance indicates.
First, they worked on finding trends earlier in their development to take advantage of a greater portion of the trend. “We started with a clean sheet. We didn’t want to use [common] trend-following tools,” says Gelrubin. “Key Trends is a pure medium-to-long-term trend-following system. There are no breakouts, no mean reversion, no pattern recognition and no moving averages. [We] use two trend-following tools: A time-sensitive price regression based model and a non-time based investor sentiment model.”
This creates a different approach to trend-following.
“The first difference is that the Key Trends trading program has a probabilistic approach to trading 50 markets,” Baguenault de Vieville says. “Probabilities and risk are calculated thanks to two trend-following tools applied on two time scales; thus four sources of information are combined to estimate the predictive distribution function.”
What results is a probability number above or below 50%. If it is above 50%, a long position is initiated, if below, a short. The probability score also determines position size and is recalculated every day. This allows them to get into a trend early with low risk and build positions as it moves in their favor.
“The position is sized based on the quality of the trend and the perceived risk of the market,” Baguenault de Vieville says. “For example, a large long position in the portfolio could be the result of a high score value, for example a 60% chance of going up, along with a low perception of risk for that market.”
While it will add to winning positions as the scores improves, often a large acceleration will cause the model to reduce a position as it increases the probability of a sharp reversal. This came in handy last August in the Treasury complex as it reduced exposure as bonds spiked higher and gave back less during the correction.
The result of its reversal model allows KeyQuant to better manage trends at the beginning and end, which often makes the difference between profit and loss. “Our strategy is very continuous and has an exposure [to] almost all the markets, all the time. This allows us to profit from the beginning of trends, and not to be over-exposed at the end of a trend. The beginning and the conclusion of trends are where trend-followers distinguish themselves from each other,” Gelrubin says.
The strategy also aggregates the probability percentage across all 50 of the markets it trades in what it calls the “Global Economic Factor” (GEF) to alter its overall exposure.
“The GEF is an indicator of the quality of global trends. The GEF can oscillate from 0.5 (low confidence) to 1.5 (high confidence),” Gelrubin says. “Trend-following investors understand that CTAs have some very appreciable run-ups, some large drawdowns and most of the time is just oscillating. The GEF tries to increase exposure during good times, being at the average on oscillations and [decrease exposure] at the very beginning of reversals.”
Another big difference is their approach to risk. KeyQuant does not use standard volatility or value-at-risk models, which Gelrubin says are ill-fit applied to trend-following. “We developed risk measures that fit with the tools used to determine the probabilities of price direction,” Gelrubin says.
As noted, KeyQuant is not a typical emerging trend-follower and people are taking notice. It has been nominated for a first-ever Pinnacle Award as one of the Top Emerging Managers by BarclayHedge and CME Group.