The launch of two new global funds complements a stable of successful South African hedge fund strategies and blended multi-strategy products
Authored by HedgeNews Africa
Cape Town-based X-Chequer Fund Management, headed by Werner Prinsloo, has successfully extended the track record of its existing funds while applying its skills to new products for the South African market as well as the imminent launch of two new global mandates.
X-Chequer’s investment team focuses on four distinct trading styles, namely fundamental market-neutral equity, fundamental long/short equity, quantitative style equity and fixed income.
Its longest running fund is the X-Chequer Market Neutral Fund, launched by founder Werner Prinsloo, the company’s CEO and strategist, in June 2006.
The fund, which invests in the South African market, has a nine-year track record, delivering a net annualised 13.7% since inception.
Outperforming over time
“There is a common perception that a market-neutral strategy can’t compete with the equity market. Yet this fund’s returns from 2006 to date are close to 220%, while the Johannesburg Stock Exchange has added 225% over the same period,” says X-Chequer COO Nik Michalopoulos. “Through different market cycles the fund has kept pace with the JSE with substantially fewer drawdowns.”
He notes that the fund has had just 13% negative months, compared with 36% from the JSE. Its comparatively fewer drawdowns have also been far smaller than those of the equity index, with the fund losing 2.4% in its worst month compared with far more extreme negatives from the index, particularly in the market crash of 2008 when the index suffered consecutive double-digit monthly losses.
“We are pleased with the results the fund has delivered,” adds Michalopoulos. “It tells a powerful story. Yes, the market has run hard over the last few years, which has led to some to say that market-neutral funds can’t keep pace. But we would argue that a market-neutral strategy can add value over an extended period and in our case it has.”
The X-Chequer Long/Short Fund is the next longest-running fund, with a seven-year record. The fund has added around 177% since launch in June 2008 compared with a gain of 106% from the JSE, beating the index by around 70% with substantially lower drawdowns.
According to Michalopoulos, the long/short fund is positioned fairly conservatively, typically with moderate directional exposure,. For example, in May it had just 24.4% directional exposure given the team’s concerns about market levels and valuations. The maximum drawdown over its lifespan has been just 3%.
“The fund demonstrates our key belief in compounding,” says Michalopoulos. “The track record shows that there is a place for a fund that has not aggressively allocated to equity markets and yet shares similar returns over what has been a strong period for the market.”
Walker Naude heads X-Chequer’s long/short strategies, with input from Prinsloo and the rest of the investment team.
Naude also focuses on the X-Chequer Flexible Long Short Fund, which has a slightly wider mandate than the original long/short fund, with scope to take higher-conviction views on some stocks and also allocate to select opportunities outside the country’s top 100 shares. The fund launched in September 2011, with an annualised return of 17.3% and a maximum cumulative drawdown of 1.7%.
Besides its fundamental equity funds, X-Chequer runs a diverse range of other hedge fund products that tap into different skillsets.
Its fixed income mandate, the X-Chequer Freestone Fund, has been running since July 2009, managed by Alfred Hoernle and Steyn Kuhn. It has returned a net annualised 8.1%.
Richard Cudmore is responsible for two core quantitative strategies, a variable-bias equity strategy and a trend-following CTA mandate. His X-Chequer Equity Hedge Fund has a track record dating back to October 2007, with an annualised return of 10.3%.
The X-Chequer CTA Fund, which launched in August 2012, has delivered an annualised return of 45.9% since inception, with almost 80% positive months.
Blending skills and strategies
X-Chequer has also blended various underlying strategies together to create multi-strategy funds, offering investors access to a diversified mix. Its two multi-strategy funds have fixed allocations to its underlying strategies, with each product catering to different risk-return appetites.
“By blending various strategies into new products we have been able to create an interesting and diverse range of funds without deviating from the core focus of our investment team,” says Michalopoulos. “Bringing different elements together has allowed us to build a different profile of fund. Our funds are all run as a collaborative effort but on each fund one individual takes the lead and drives the process.”
The X-Chequer Duo Multi-strategy Fund has been trading live since October 2012, delivering a net annualised 11.61% since launch.
“It is a well-diversified, consistent absolute-return fund for those investors who are looking for something that is not very directional and has a range of different exposures,” says Michalopoulos.
The longer-running X-Chequer High Growth Multi-Strategy Fund operates along the same principals, with a larger capital allocation to underlying strategies. It has just reached its fourth anniversary as a standalone fund, with a compound net annualised return of 26.9% since inception and a maximum cumulative drawdown of just 6%.
Diversified sources of return
X-Chequer also offers combined allocations to either market neutral or equity mandates via single fund structures.
The X-Chequer Diversified Market Neutral Fund, launched in February 2014, is an amalgamation of Prinsloo’s fundamental relative-value market-neutral strategy and Cudmore’s more quantitative momentum-style trading fund.
“The strategies are relatively uncorrelated and, as a result, offer a diversified market-neutral return,” says Michalopoulos. “The main thesis of this fund is that diversification does reduce volatility and that has been borne out by the returns – the fund has had just one drawdown in 18 months, of 0.5% in January. We think there is a place for this product as it is very absolute-return focused and, in the long-term, may well attract institutional interest.”
With Prinsloo’s flagship fund having been hard-closed to new investors for a number of years, the new vehicle means the team can provide additional capacity whilst using their existing skills. The fund incorporates portfolio management input from Nico McDonald, a chartered accountant and CFA charterholder, who has been part of the team since 2007.
The X-Chequer Equity Alpha Fund is a blend of both Cudmore’s strategies, namely the variable-bias equity trading style with a 15% allocation to his trend-following CTA strategy. “This fund sits between the prudent equity approach and the more aggressive CTA strategy, which is known to be more volatile,” says Michalopoulos.
The fund’s record stretches back to November 2013, during which time it has gained a net annualised 8.7% with a maximum cumulative drawdown of 2.5% and 78.9% positive months.
Limited domestic capacity
With its domestic strategies in place, Michalopoulos says the team is looking to fill capacity across its fund range in the next 12 months, either through direct investments into its singlemanager funds or via the multi-strategy mandates.
“It does depend somewhat on where the capacity is taken up, but we estimate that we have around R800 million capacity left in our domestic mandates, which would take our managed capacity to just more than R4 billion,” he says.
X-Chequer’s investors are predominantly institutional via fund of hedge funds as well as some retail clients. It expects to register most of its funds as retail products under South Africa’s new regulatory regime.
Looking further afield
With limited capacity left in its domestic mandates, the team is also planning to launch two new global mandates, due to go live on August 1.
Both global funds will be pure dollar vehicles domiciled in the Cayman Islands.
“We deliberately have no South African exposure from a market diversification and a regulatory perspective – the funds are designed to accommodate the offshore allocations of South African investors, with no looping back to the domestic market, in keeping with Reserve Bank requirements,” says Michalopoulos.
“We have strong relationships with our current high-net-worth clients and some have already indicated that they would like to invest alongside us in the global funds,” he adds. “Initially we expect most investors to be South African but over time would aim to attract global interest.”
The X-Chequer Global Hedged Fund will be lead managed by Jan Silvis. A chartered accountant with an MBA and a CFA, he joined the team in 2012 as an analyst on the marketneutral fund and to explore global opportunities.
It is primarily a relative-value market-neutral mandate, incorporating key aspects of the approach and process used in the flagship market-neutral strategy and applying them in a more systematic way to the global markets.
The strategy has been run internally for 18 months, which has allowed the team to fine-tune it to the point where it is now confident it can produce sustainable alpha going forward.
The fund has no mandated geographic restriction, but practically the team is finding most opportunities in the US market, with about 80% of the fund’s positions currently in the S&P 500.
After three years managing a South African CTA fund, Cudmore will also be managing a global CTA fund as of August 1, tapping into his extensive global experience gained during his eight years spent in London where he traded hedge fund and proprietary strategies.
The X-Chequer Global Equity CTA Fund will replicate the South African trading strategy based on the S&P 500, and will include other markets over time. The strategy has been extensively backtested, with the quantitative process delivering an annualised return of 54.9% since January 2008 and with 75.9% positive months. It has added 2.3% since going live in April. “We believe the fund offers the same return potential as the backtesting suggests, given that this is a systematic process,” says Michalopoulos.
Going forward, the X-Chequer team plans to continue applying their minds to a product range that is designed to make the most of their skills and experience. They will be looking to add to the 10-strong investment team when people with the right skills and track record present themselves.
One recent addition to the team is that of Leonard Steenkamp, who joined in January to work with Naude on the equity long/short process. He was a partner and founding member of T- Capital, where the pair worked together previously, and was most recently CEO at Consilium Stockbrokers in Johannesburg.
Looking at the investment opportunity, Michalopoulos says the X-Chequer team has been concerned about market levels for a while. “ We have been cautiously positioned and we remain concerned about the valuations and levels of the market,” he said. “Over the last few months we have had the view that a correction is possible and we have therefore traded accordingly. Time will tell if the market shares that view.”
Despite the fact that the investment team has focused on less directional exposure, he says they have nevertheless accepted the reality that the market has continued to rise over an extended period, and have been managing their trading accordingly.
“We have focused away from generating returns on a pure beta directional basis and yet over the last while we have still managed to generate decent positive numbers. It gives us confidence that if there is a meaningful market drawdown we can continue to generate positive returns because we have been cautiously positioned.”
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