Winners in the CTA category: (from left) Peter Warren (Warren Capital), Klaus Oesterballe (Capricorn), Kamran Ghalitschi (HedgeFonder.nu) and Mike Marcey (Efficient Capital)

Warren Capital and Capricorn were announced winners in Hedgeaward’s “Best CTA” category. In the case of Warren, the manager won both first and third price (Warren Short Term and Warren Fourth Moment Macro). HedgeFonder.nu took the opportunity to ask five questions to the managers behind the funds.

1. What do you think makes your strategy special?

Peter Warren – Warren Capital:

Be advised Fourth Moment and Warren Short-term Trading have completely different strategies. Fourth Moment being a traditional global macro fund while Warren Short-term Trading only trades intraday.

The major difference between these two funds is that Fourth Moment tries to make informative decisions based on an analytical model developed and used by the world’s intelligence services. This means second sourcing data for verification and concentrating on not using cognitive bias in our decision making process. Once an imbalance or trend has been discovered we got to the next phase of deciding which asset class to use. Liquid asset classes are preferred and based on our options background non linearity is often employed in order to reduce risk and in general improve our risk/reward profile. 95% of idea generation is done internally and this shows in our correlation to the HFRX Global Macro Index being -0.019 over the life of the fund. Fourth Moment has in addition no significant correlation to other asset classes over time.

Because of the fund’s short-term nature, Warren Short-term Trading (WST) has a completely different philosophy. Our hypothesis is that most of what happens in the markets during a single day is noise created by orders, rumors and other temporary influences and that there is no informational value in this. Unlike Fourth Moment we do not try to separate the signal from the noise in WST but accept it for being just noise. There is no sense in trying to understand noise so we do not spend time on this. Time is instead spent on creating mathematical and statistical models meant to uncover short-term human behavior. Risk management – stops loss levels – are purely financial and we do not set them according to technical levels etc. WST only trades in the most liquid futures contracts plus major currency pairs (in the interbank market).

Mikkel Thorup – Capricorn

The 3 individual strategies, which creates a portfolio effect within the strategy itself, and keeps the returns steady and low vol, which is exactly what the clients are looking for these days. The liquidity and low transaction cost of FX makes the current market environment profitable even at moments of calm, which we’re seeing now, even if alpha is harder to come by these days.

2. What was the most profitable trade/theme of last year?

Peter Warren – Warren Capital:

The last couple of years have due to deteriorating macro masked by central bank interventions been very difficult in the global macro space. Pure alpha generation in addition to running positive convexity was instrumental in providing a good result. If I need to single out one trade in Fourth Moment I would say it was a position gaining on the reduction of the backwardation in crude oil.

In WST most money was made in interest rate futures.

Mikkel Thorup – Capricorn

Playing the theme of market calmness was our most successful theme in 2012, with returns coming from a relatively static positioning being long carry, and also from selective discretionary trading.

3. What was the single biggest losing trade/theme of last year?

Peter Warren – Warren Capital:

Short JGBs in the global macro fund. Given the state of the Japan the price is in our opinion silly.

Mikkel Thorup – Capricorn

Actually, there were not really any longer term losing themes or trades in 2012, only a couple of hick-ups on the road in terms of too tight stops on our discretionary trading.

4. How did you manage to cope with the difficult markets experienced by CTAs in March, June and October?

Peter Warren – Warren Capital:

Our models seem to work on other factors than most of our competitors’.

Mikkel Thorup – Capricorn

The blend of the 3 sub strategies did that for us, so when CTA’s typically tend to do badly, it is in market whipsaws, these whipsaws were very well absorbed by our short term systematic overlay.

5. Looking at the year ahead, what is your view on the market environment and what opportunities/threats do you see for your particular strategy?

Peter Warren – Warren Capital:

In the global macro space we believe the current divergences between macro reality and financial market development needs to converge. We believe we see a number of cracks in the “dam” already (JGBs, gold, volatility, JPY) and feel uncertain how much more money printing the dam can take before something gives.

The main threat is that one stops believing in reason and capitulates to trades that do not make sense only because others are making money on it. It is remarkable that it has taken less than 5 years for the market to forget the experiences of 2008.

Mikkel Thorup – Capricorn

We believe that market behavior will remain much the same as seen in 2012, hopefully with a tick up in general volatility a notch or two, with our strategy doing well in this environment, the threat being excess volatility or great uncertainty. We know the periods of lower vol are tough to go through, and they always end. When that happens, we can benefit the most from all 3 strategies combined.

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