Back-testing A Systematic Fund of Managed Accounts

By: Peter Urbani*

KnowRisk CONSULTING
* Peter Urbani was most recently Chief Investment Officer for Infiniti Capital a Fund of Hedge Funds group. He is a 20 year investment industry veteran and has served variously as Head of Portfolio Management, Head of Research both Quantitative and Qualitative, Head of Investment Strategy and as a buy-side Mining Research Analyst. NOTE: The Lyxor Fund universe used within this presentation is used for illustrative purposes only. We have no affiliation of any sort with Lyxor and this is not a solicitation or recommendation to buy or sell any of their products.

Lessons from the Credit Crisis
‡ Funds of Funds business model under pressure ‡ Scale AUM > $5bn or Niche e.g. Asian focus, Emerging Managers ‡ Fees under pressure ‡ Historic Fees 2:20 - the new normal 1:10 ± 1:15 ‡ Demand for greater TRANSPARENCY ‡ Demand for greater LIQUIDITY ‡ Historic Liquidity 90 ± 120 Days now 30 Days wanted ‡ New Fund Vehicles ± UCITS III, Managed Accounts, Act40 ETF¶s

One Possible Solution A Fund of Managed Accounts
‡ Meets the demands for Liquidity ± Mostly weekly ‡ Improved Transparency ± Daily pricing and aggregated exposures ‡ More frequent pricing allows for systematic method backtesting ‡ Reasonable Returns achievable but estimated Liquidity Risk premium of approx 2.00% paid by consumer in the form of lower returns ‡ Range of offerings is improving but still small relative to the Hedge Fund Universe. Multiple platform providers

A Systematic Fund of Managed Accounts utilising the IAS SFA scoring methodology

Proprietary Software

Import Fund Selection Universe

Data Import Wizard

Imported Database Of Fund Returns

Portfolio Optimisation Setup and Constraints

Objective Function To Use + = Maximise - = Minimise

Simulated Annealing Optimisation Algorithm
Iterative process that initially allows for worse solutions to be accepted to ensure that the feasable search / solution space is fully covered. Can accommodate highly non-linear objective functions and multiple constraints

Single Period ( in-sample) optimisation

Next Period ex post ( out-of-sample) return

Advanced Settings Multiple Run Walk Forward Optimisation

Walk Forward Optimisation
Next Period ex post ( out-of-sample) return

....

Out-of-sample next period returns

....

Walk Forward out of sample returns

Selection Based on Custom SFA Score Ranking of Risk Return Persistence

SFA Score Constituents And Standardisation

Trust but Verify

Always provide sufficient information for clients to independently verify results

Lower Downside Beta

Higher Upside Beta

Non-Linear Bivariate Dependence

Higher Average Returns

Lower Drawdowns

Less Downside Risk

Higher Upside Potential

Fund Factsheet with SFA Score

Best-Fit Distributions Goodness of Fit

Scores for Risk

Scores for Return

And Persistence

4-Moment Risk Decomposition

4-Moment Risk Decomposition allows for more meaningful disclosure. Includes Modified StdDev and CVaR, Liquidity VaR and Drawdown at Risk (DaR)

Four Moment Density Forecast

Current Weights Versus Equal Weighted

Note significant reduction in CTA weighting from benchmark and previous period

DISCLAIMER ± IMPORTANT NOTES
The information and opinions in this presentation were prepared by KnowRisk Consulting (collectively ´KnowRiskµ). This presentation is provided for information purposes only. It is not an offer or solicitation to enter into any agreement or contract with KnowRisk or any other party. Whilst all reasonable care has been taken to ensure that the facts stated herein are accurate and that the opinions and expectations contained herein are fair and reasonable, KnowRisk makes no representation or warranty, express or implied, with respect to the fairness, correctness, accuracy reasonableness or completeness of the information and opinions herein but has obtained the information from sources believed to be reliable. Analyses contained herein are based on assumptions that if altered can change the conclusions reached herein. KnowRisk has no obligation to update, modify or amend this publication or to otherwise notify a reader in the event that any matter stated herein, or any opinion, projection, forecast or estimate set forth herein, changes or subsequently becomes inaccurate. The information is not intended to depict or predict actual investment performance of any financial product and is subject to change without notice. Any opinions expressed herein reflect KnowRisk·s judgment at the date and time hereof and are subject to change without notice. KnowRisk is not acting and does not purport to act in any way as your advisor. We therefore strongly suggest that you seek your own independent advice in relation to any legal, tax, accounting and regulatory issues relating to the merits or otherwise of the products and services discussed. Financial instruments that may be discussed herein may not be suitable for all investors and any investors must make any investment decision using their own independent advisors as they believe necessary and based upon their specific financial situation and investment objectives. If a financial instrument is denominated in a currency other than an investor·s currency, a change in exchange rates may adversely affect the price or value of, or the income derived from, the financial instrument, and any investor in that financial instrument effectively assumes currency risk. Prices and availability of any financial instruments described in this presentation are subject to change without notice. Nothing contained herein shall constitute any representation or warranty as to future performance of any financial instrument, credit, currency, rate or other market or economic measure as past performance is not necessarily indicative of future results. The information contained herein is CONFIDENTIAL. It is intended only for the use of the person to whom this document is given and may not be reproduced or redistributed in whole or in part without the prior written consent of KnowRisk. This does not constitute an offer to sell, or the solicitation of an offer to buy, any product. An offer may only be made by means of the offering memorandum and governing documents of the relevant funds (the ´Fund Documentsµ), which should be read in their entirety. The information is not intended to be complete or final and is qualified in its entirety by the Fund Documents. In the event the Information is inconsistent or contrary to the descriptions or terms of the Fund Documents, the terms of the Fund Documents shall prevail. KnowRisk (i) may be a market maker or specialist in securities issued by companies mentioned herein (ii) may act as an adviser, underwriter or lender to companies mentioned herein (iii) may have received or intend to seek compensation for investment services from companies mentioned herein (iv) along with its respective officers, directors and employees may affect transactions and/or hold long or short positions in the underlying securities or related financial products of companies mentioned herein. The information contained herein is intended for illustrative purposes only, has been developed internally and has been based on variations of existing funds, managed accounts, simulations, extrapolations of other investment programs, pro forma data or taken from trade and statistical services and other sources that we deem reliable, although no warranty is made that the information is accurate or complete and it should not be relied upon as such. Any securities discussed herein may not be suitable for all investors. Transactions of the type described herein may involve a high degree of risk, and the value of such instruments may be highly volatile. Past performance is not guarantee of, and cannot be construed as an indication of, future results.