Our Strategies

Alpha

CFM started as a hedge fund manager focusing on systematic trading strategies. Today such strategies are referred to as absolute return of Alpha strategies.

Our two flagship investment programs were launched in 1991 and 2003 respectively. They are multi award winning and have the objective of achieving consistent returns, in variable market conditions with a risk profile that seeks to be less volatile than general market indices. The performance of these programs, which aims to have less correlation to general market indices, represents our Alpha strategies. These strategies are based on exploiting medium term (days to months) inefficiencies in markets and so portfolio turnover is relatively high.

These programs are the zenith of our collective capability and are structured to reflect the fact that achieving a combination of acceptable risk and decorrelation from market indices requires considerable expertise, investment and R&D capability. The strategies in the programs are therefore subject to constant evolution with a view to maintaining the Alpha characteristics and manage decay.

Alternative Beta

For over 25 years we have invested in quantitative research and development resulting in the creation of successful absolute return programs. Alpha strategies are by definition capacity constrained, complex and have associated higher fees making such strategies attractive to only a small minority of investors. Mainstream investor appetite for simpler strategies with an attractive fee structure is growing. Mindful of this and the constraints of the absolute return programs, in 2012 we began developing a different type of program, which would use the firm’s existing expertise and capital expenditure to appeal to a broader set of investors. The programs were launched in 2013 and 2014 with the hallmarks of our quantitative approach but with less complexity, higher correlation and appropriate fees.

Alternative Beta, a definition: ‘Alternative strategies’ have historically been associated with hedge funds on account of the fact that the traded instruments in such strategies are often not ‘traditional’ equities and bonds and the returns profile is often decorrelated from equity and bond benchmarks. Such strategies are now making their way into more mainstream investment circles, but the associated investment styles continue to be known as ’alternative’. Alternative Beta is therefore an investment style with returns correlated to these now well-known alternative benchmarks  and therefore not to traditional equity or bond benchmarks such as the S&P 500. The definition of an alternative benchmark is not as clear cut, or accessible, as in the case of equity or bond indices, but is instead assumed to be a standard implementation of a standard alternative trading strategy.

While a strict definition of Alternative Beta strategies remains elusive, various important themes tend to emerge:

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Strategies that persist over long periods of time – often decades or even centuries. Levels of statistical significance need to be sufficiently high to establish strong conviction that the systems are not over-fitted but well anchored in the structure of the markets.

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Strategies that are slower moving, as opposed to the short term inefficiencies that are generally arbitraged away through time and exploited in an absolute return strategy. Importantly the slower strategies tend to be scalable to higher capacity.

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Strategies that are explainable, understandable and plausible.

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Alternative beta strategies can generally be split into two types risk rewarding or so called risk premia and pure market anomalies often of behavioural origin.

In short, a diversified Alternative Beta program is a mix of simple, well-justified strategies, seeking to deliver persistent excess returns with scalable capacity, while exhibiting low correlation to traditional equity and fixed income benchmarks.

CFM Product Showcase from Financial Standard

 

Our Implementation

The synergies between the Alternative Beta and our Alpha programs make for a highly differentiated approach when it comes to implementing the Alternative Beta strategies and one that shouldn’t be underestimated. This differentiation manifests itself in the following ways:

  • Portfolio Construction

    Portfolio construction, together with return generation and execution, is a vital aspect of building a sound investment program. It requires robust data and developed statistical methods which we have honed over many years.

  • Systematic risk management based on in-house IT infrastructure

    Our IT/Data infrastructure, built over two decades at a cost of more than €100m, has been specifically designed for quasi real time risk evaluation. So while the trading patterns are slower in the Alternative Beta strategy, regular updates of positions and market condition indicators are important in building a reliable risk control infrastructure.

  • Robust operational risk control

    The monitoring and management of operational risk at all levels in the production chain is important. While certain risk monitoring tools are embedded in the trading systems and maintained by the front office teams, we also maintain a dedicated, independent risk team, reporting directly to our firm’s directors, whose mandate is to independently validate financial risk estimates and to independently impose operational risk limits.

  • Industrialised, large-scale data processing

    Our data team is responsible for collecting, cleaning, manipulating, and managing terabytes of incoming data every day. Our data sets range from price-related information (e.g., prices, implied volatilities) to fundamentals (e.g., corporate financial statements) and non-financial information for trading ideas that exploit idiosyncratic, market-specific inefficiencies. Given the lower turnover of Alternative Beta strategies, achieving statistical significance is facilitated by the longest back tests possible. Time-series data for futures and equities extends back at least to the 1960s and 1970s and, where possible, we also maintain certain data series as far back as 1800 (e.g., monthly data for many indices, commodities, bonds, and various interest rates). We currently monitor approximately one million instruments.

  • The Importance of minimising costs

    Controlling trading costs in the implementation of any strategy is critical. Our dedicated execution research team manages our infrastructure and seeks to model, measure and reduce costs. We have an extensive database of the execution of our own trades, data which is not commercially available, and which provides valuable insight into the dynamics of price impact. Our execution team has also published numerous papers in this field, in particular on the subject of market impact.

Our Approach

We believe that financial markets are constantly evolving and that the markets have a degree of predictability made increasingly more apparent by data. This creates a strong environment to create alternative investment strategies that provide risk adjusted returns with a low correlation to traditional investment markets benchmarks. 
We believe that:

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Most alpha trading models decay over time.

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Delivering continued value is only maintained by an ongoing research and development effort.

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Risk management is of utmost importance.

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Diversification works.

  • Technology

    Over half of our employees are data scientists and since our inception in 1991, we have invested over €100m in sophisticated information technology systems. This state of the art platform gives vast processing power to collect and sort the data needed by the research teams. Today, we have over 1,500 servers enabling the collection and presentation of over 3 terabytes of information every day, the equivalent of a typical academic research library.

    The data team collects, cleans, and manages terabytes of incoming data every day. We thrive on new forms of data as inputs to systematic trading ideas. Data is also collected to simulate the whole production chain from end to end to ensure that positions and performance are in line with back tests. Data sets need to be as broad as possible to inspire new ideas, but also reliable and readily accessible to the research team.

    Systematic trading also requires advanced technological capability whether this is placing orders, reconciliation or monitoring risk. We are connected in real-time to about 20 counterparties (exchanges, execution brokers, electronic platforms, banks, etc.). We have developed control systems to monitor operations and manage potential issues.

  • Research

    As a firm, research is in our DNA and the basic principles established in 1991 remain unchanged today. We create models based on the statistical properties of financial instruments and then use these models to develop systematic trading strategies.

    We have assembled a team of top researchers with strong academic track records. Most of our researchers hold PhDs, from some of the world’s leading academic institutions, mostly in physics or other hard sciences. We carefully select our research team ensuring that most of them join us directly from academia, a distinct point of difference for the firm. This gives us a uniquely dispassionate and unbiased approach to our research, which is ultimately reflected in the strategies across our programs. In particular this is important in our Alpha programs, where the researchers’ distinctive backgrounds are critical in order to drive the consistent innovation and R&D necessary for maintaining the programs’ alpha characteristics.

  • Risk

    All trading strategies are rigorously tested and piloted prior to deployment. A dedicated team monitors trading portfolio risk to gauge risk levels and performance. This process relies on in-house developed monitoring software. In periods of extreme market volatility or unprecedented market events, the board has the authority to override the algorithms and reduce portfolio risk. We manage other risks and in addition, we have built over more than two decades professional functions including: IT, HR, legal and compliance to support the firm and its clients.

ESG

Quantitative investment strategies and ESG are two of the fastest growth areas within the asset management industry. With investors evermore savvy and interested in both, we believe that the investment landscape is likely to be altered by their continued, and collective development.

As one of the pioneers of systematic quantitative investing, and armed with the belief that responsible investment efforts are likely to alter market dynamics, we are poised with our ESG investment solution.   

Considering the E dimension for instance, it seems clear: the ‘brown’ dynamics that fueled the previous century are fading in favour of a transition to a ‘green’ economy – with effects likely to be both broad in scope and significance.

This transition will evoke a complexity challenge that demands an understanding of sector and company relationships; foresight of how and when to seize emerging opportunity and avoid risks; expertise in finding and analysing the right information; and know-how and tools to extract the maximum value for our clients. 

Our strategy is predicated on all these abilities so as to identify those companies that will be the winners and losers of this transition, but at the same time not remaining agnostic to the importance of Governance and Social issues.

To this end, CFM differentiates between specific E, S and/or G factors that are of an ethical nature, for which it will take guidance from its investors rather than imposing its own views, and those whose financial materiality has now clearly emerged, as the probability of some internalisation of negative externalities increases, and for which it considers within its mandate to identify and manage corresponding risks and opportunities.

  • Policies

    • We leverage multiple ESG datasets in a process that is fully integrated within its core research teams in order to extract maximum informational value from them.

    • We refrain from establishing long positions in manufacturers of the sort of controversial weapons referred to in the Ottowa and the Oslo Conventions.

    • We consider our own corporate social responsibility along three pillars with the ambition to:

    • 1. be a good employer, promoting diversity and gender equality;

    • 2. manage our own environmental footprint, and;

    • 3. adhere to and promote best RI practice within the industry.

  • Governance

    In order to carry out its responsible investing agenda, CFM’s Board has put into effect the following governance structure:

    • 1. The CFM ESG & TCFD Steering Committee, comprised mostly of board level executives, that sets the targets and monitors progress.

    • 2. The ESG Research Task Force that implements the ESG integration objectives set by the above mentioned committee combining CFM’s full capacity in predictor selection, portfolio construction and ESG expertise.

    • 3. The CSR Task Force that suggests corporate policies aiming at improving CFM’s environmental footprint and societal impact as an employer.

    An internal CFM ESG Policy document setting out all of the above in more specific detail is reviewed by the CFM ESG & TCFD Steering Committee on a yearly basis.      

  • Intentions and beliefs

    CFM’s Responsible Investment policy is based on a set of intentions and fundamental beliefs:

    • CFM’s intention is to carry out its fiduciary duty to its investors in line with the principles laid out in the ‘Fiduciary Duty in the 21st Century’ report backed by the UNPRI, UNEP FI, UNEP Inquiry and UN Global Compact.

    To this end, CFM differentiates between the ESG factors that are of an ethical nature, for which it will take guidance from its investors rather than imposing its own views, and those whose financial materiality has now clearly emerged, as the probability of some internalisation of negative externalities increases, and for which it considers within its mandate to identify and manage corresponding risks and opportunities.

    • CFM acknowledges that positioning, voting and engaging activities may produce a societal impact, however small.

    • Positioning matters to underlying companies’ future cost of funding. This statement, at odds with the efficient market hypothesis, is central to CFM’s conviction that ESG integration can have a positive societal impact.

    • This is true independently of the format used (cash securities or derivatives), as what matters is the amount of self-determined economic exposure.

    • Voting set aside, shorts are symmetrical to longs in their impact, and any metric applied to long positions extends linearly also to shorts.

    • Any trading in a stock brings additional liquidity to it hence lowers the cost of capital of its underlying company everything else being equal. However CFM believes this factor carries little weight when compared to the negative price pressure caused by selling, resulting in a net increase of cost of capital when shorting securities. As a result, negative exclusions apply to our longs, not to our shorts.

    • CFM believes that, if proper attention is paid to core and dynamic financial materiality, ESG integration is not a distraction, rather a compass to be used alongside its mandate to seek solid risk adjusted performance, as markets are more and more aware of the increasing probabilities that externalities will one way or another, over time, find their way into the price discovery mechanism.

    • Everything else being equal, greater emphasis is likely to be placed on factors carrying persistent financial materiality and less dependent on subjective appreciations or cultural variations.

    • Whenever we hold physical securities on record date, we will vote having our clients’ best interests in mind. In particular we will encourage companies whenever practically possible to improve transparency and disclosure around how climate change may impact their business and strategy. On that front, CFM is a signatory and supporting member of various industry organisations. See below for more detail.

     

  • Affiliations

    The Principles for Responsible Investment (PRI)

    CFM became a signatory of the PRI in October 2018. We maintain a close relationship with the PRI and served on the PRI Hedge Fund Working Group. We are also contributors to the PRI technical guide on ESG incorporation.

    Technical guide: ESG incorporation in hedge funds

    Alternative Investment Management Association (AIMA)

    We are an active member of AIMA and take part in various industry focused discussion and working groups; contribute to working papers and research briefs, and  

    Short Selling and Responsible Investment

    Carbon Disclosure Project (CDP)

    We have been a Member Signatory of the Carbon Disclosure Project (CDP) since 2019. As a signatory, we add our name to a long and growing list of investors and managers that support greater disclosure of environmentally related information and metrics.

    Climate Action 100+

    CFM joined this initiative in 2020. As an Investor Collaborator we support the work of engaging with those companies identified as the world’s largest emitters of greenhouse gas.

    Swiss Sustainable Finance 

    CFM is a signatory to the Swiss Sustainable Finance open letter to index providers asking them to  “exclude controversial weapons from their mainstream indices in order to align their products with what has become standard practice or expectation among institutional and individual investors.”

    The Standards Board for Alternative Investments (SBAI)