Important: This Article Is For Use By Professional Advisers And In Relation To Investment For Sophisticated Investors Or Hight Net Worth Clients Only.
Sue Whitbread talks to Nicholas J. Edw ards of T8, about the attractions of combining s trong risk management with an absolute returns focus from a new fund investing in forex
We’re only a few months into it yet 2019 is already proving to be a tough time for asset allocators and investment managers. Making informed decisions to create an appropriate and complementary blend of investments within a well-balanced portfolio is always a challenge but particularly so given the current market uncertainties. Gone are the days when a simple blend of exposure to equities, bonds and cash would suffice.
The headwinds of Brexit, the threat of rising interest rates, concerns about trade wars and adjusting to the concept of a post QE era are just a few of the reasons why there is so much uncertainty about the overall health of the global economy at present. This has big implications for advisers and investment managers who are on the lookout for alternative assets that might combine well within a balanced investment portfolio to help reduce the overall exposure to risk and volatility by increasing diversification.
The T8 Alternative
This is a space where T8 management are looking to appeal, by providing a very different investment strategy to complement other assets in a client’s portfolio. The business has just launched its new T8 fund which is an offshore fund aiming to attract the attention of advisers as well as qualified investors. It is certainly something different – being based on using foreign exchange (FX) strategies as the means to deliver real returns for investors. The fund provides liquidity through a monthly redemption facility. Before you draw a sharp breath at the very mention of FX, the clear objective of the fund is to deliver absolute returns whilst employing very strict risk management controls. It’s certainly not a fund aimed at smaller investors with its relatively high minimum investment level at $25,000, but with a stellar performance record underpinning it, for suitable clients and as part of a balanced portfolio, it deserves consideration.
These days it is rare to find something very different when it comes to investment. Many advisers might be cautious to even consider something which is outside of the more traditional investment areas and, after all, FX is an area which may be an unfamiliar concept. However, FX is the world’s largest and most traded financial market. It continues to grow and has an average turnover in excess of $5trillion per day in 2017 compared to $4trillion a day in 2010.
Due Diligence And Regulation
Of course, advisers who might see the appeal of such a complementary asset class will carry out full due diligence. This is likely to start with the regulatory position of the fund itself.
The T8 fund’s segregated portfolio is an exempted company with limited liability incorporated in the Cayman Islands and registered as a segregated portfolio company.
The fund is registered with CIMA in the Cayman Islands as a Regulated Mutual Fund. But what does that mean? The Cayman Islands remains the second largest captive offshore fund domicile in the world. The majority of all funds worldwide having the characteristics of a Hedge Fund are CIMA authorised. As of June 2018, there were 10,708 Mutual funds registered.
The underlying T8 strategy isn’t new. It was first launched in December 2013 by T8 Management’s strategic partners via dedicated managed accounts and has now reached circa $300 million in assets under management. It’s on this basis that the T8 fund has been designed. It has been launched in order to appeal to a wider range of sophisticated investors but the algorithmic strategy it uses has been tried and tested by the managed portfolios since 2013 – and with no monthly losing periods. The fund will offer smaller “professional” investors access to this trading strategy via the dedicated fund structure which facilitates access for those with less than the minimum $5million currently required to open a separate managed account.
The T8 fund is designed to be a defensive first trading strategy and incorporates over 40 years of combined trading experience.
Nicholas Edwards, CEO of T8 Management is the brains behind the fund offering. He is clearly passionate about the fund and its approach as well as the hugely scientific and algorithmic processes which lie behind it.
Edwards has four decades of experience in the financial sector as an institutional equity broker, corporate financier, closed-end funds specialist and for the past fourteen years as a hedge fund manager with a focus on trading and FX.
He comments “Financial markets are evolving at a rapid pace, due to the rise of automated trading algorithms. Personally, I have a deep interest – you might even call it a fascination – in the process of trading. Throughout my career I’ve seen good traders do very well, but then very badly as egos and other problems get in the way. Our approach has been to build a strategy which can capitalise on the opportunities available but in a way which minimises the downside risk”.
The trading team behind the fund are specialists in their field, each bringing a depth of experience and knowledge in identifying leading edge systematic trading systems. They have been algorithmically trading in the spot FX markets since 2007. Since then, the strategy has been successfully making consistent month on month profits for its investors in the managed portfolios as can be seen in table 1.
Their process is based on long term testing to ensure that they can deliver absolute returns consistently, whilst controlling risk. The algorithmic process which rests behind it is rather too detailed for us to explain here but it is based on minimising exposure to risk assets and to leverage by constantly reviewing indicators to indicate possible opportunities. As added protection, the team employs a stop loss system when carrying out trades. The use of highly sophisticated algorithms minimises the risks associated with FX trading by mathematically modelling market patterns and hedging in order to balance opposite risks.
Risk management is clearly an important component of the T8 trading programme as Edwards takes great pains to explain. “The risk strategy the fund employs is rigorous, proven and key to our investment management style hence we have embraced an innovative, technology-led trading approach.”
This filters down to the trade management team’s philosophy, which is that risk management is arguably more important than the trading strategy. They believe that in the trading program risk can be defined and managed, whereas the potential profit of the trading strategy is totally nondeterministic.
The use of highly sophisticated algorithms minimises the risks associated with FX trading by mathematically modelling market patterns and hedging in order to balance opposite risks
It’s far from a one dimensional approach. There are many different facets to the control of risk within the process. As well as the systematic approach, the comprehensive structure of multiple proprietary algorithms that use current market momentum, volatility and a mix of diverse high probability technical analysis indications for entry and exits into the spot forex markets support the mitigation of risk.
The trade team follows a stringent 4-step process when it comes to portfolio risk management, starting with topdown thematic analysis and working through directional and non-directional biases in multiple foreign currency markets and skewed asymmetric return profiles as well as liquidity on trade entry and exits. The nature of the fund’s approach is such that short term trades can last simply a matter of seconds or minutes. A long term trade is one which lasts overnight! Other risk controls exist around minimising leverage, and diversification of the types of trades which are carried out. It sounds complex, but the years of research and testing that has been undertaken by the T8 trade management team has refined the process efficiently. There is also the additional comfort of a human overlay in place to ensure an orderly process is always being followed.
The FX market can be volatile and unpredictable. As Edwards explains, “these markets can be very dynamic. It is therefore difficult to make accurate predictions or assumptions regarding market price movements and how price changes will affect the market.
“In summary, it’s all about risk. If we understand risk and can get this under control then we know what we’re dealing with. As a result, if we can help investors to not lose money but to make some profits along the way then that’s great and that’s our focus. It’s all about making absolute returns. That’s what really matters.
“By adopting this highly disciplined, controlled risk approach within the fund we believe our offering will remain robust for many years to come”.
It’s Good To Talk
Finally, Edwards is quick to recognise that before any adviser or investment manager will make any decisions regarding the use of the fund, they will need to have detailed information and an understanding of what is going on within it. “I’d be delighted to talk professional advisers through what we do. I’m a people person and these are the kinds of concepts that are much easier to fully explain either face to face or through a conversation so that we can really get down to the detail. We’re very excited about the fund and very keen to build relationships with professional advisers and investment managers to help them to capitalise on the investment opportunities which it offers”.
For more information visit www.t8.fund
This feature is for professional advisers only and not for consumer use. The T8 fund is a priv ate placement offering for qualified, eligible investors only. The fund should only be marketed to investors who are “accredited or qualified investors” as defined by the Cayman Islands Securities laws, before they can invest in the fund. The T8 Fund Segregated Portfolio is a segregated portfolio company of the Carlton James Mollitium Investment Management offshore fund manager platform, which is an open-ended investment fund established as an exempted segregated portfolio company limited by shares in the Cayman Islands. Carlton James Mollitium Investment Management is a Cayman regulated entity, authorised by the Cayman Island Monetary Authority (CIMA) to act as the investment manager for the Carlton James Mollitium Offshore Fund Managers Platform SPC.
Nicholas has spent 38 years in investment banking and asset management within the UK. He has w orked with some of the largest and most renowned ‘names’ in the industry including: James Capel, BZW, Barings and SG Group as well as a number of venture capital and private equity businesses, in which he has specialised in leading edge high growth opportunities. In 2018 Nicholas moved his business interests in the T8 fx trading strategy offshore to the Cayman Islands and T8 Management was created.
Nicholas still plays a key role within a UK hedge fund management business, Alternative Asset Management, Regulated and Authorised by the Financial Conduct Authority in the United Kingdom. He leads a busy life with his workload split between offshore travel, meeting with investors and managing his Cayman operations, as well as investor communications, management of investor funds along with new product development here in the UK. Maintaining existing client relationships and facilitating new client relationships (mainly through introductory brokers and IFAs) is carefully balanced with his role in active portfolio management responsibilities.
FCA controlled functions status: CF1 Director, CF3 Chief Executive, CF8 Apportionment and Oversight Function, CF10 Compliance Oversight, CF11 Money Laundering Reporting, CF29 Significant Management Function.