Merricks Capital Systematic Commodity Strategy

Transcription

1 Merricks Capital Systematic Commodity Strategy

2 The Evolution > As an evolution of the existing fundamental discretionary trading strategy, the Merricks Capital Systematic Commodity Strategy provides a more targeted access to the risk premia associated with commodities than a traditional discretionary commodity fund > Merricks Capital Soft Commodities Fund has evolved it s process from a pure discretionary fundamental investment strategy to a fundamental investment approach that uses a systematic process of filtering, selecting and timing of commodity trades > This strategy is superior to the traditional discretionary commodity trading fund for the following reasons: > Generates a broader opportunity set > Has a higher hit rate > Scalable > Weekly Liquidity > More accurately positions for asymmetrical payoff > Enhanced entry and exit timing > Defined hard stop loss on every position > Lower cost 1

3 Introduction > Merricks Capital Systematic Commodity Strategy provides a more targeted access to the risk premia associated with commodities than a directional approach traditionally used > Merricks Capital has identified the major market drivers of it s investment universe within defined market conditions > The strategy uses a systematic process using these drivers and defined market conditions to determine the timing of the application of risk premia to markets. These market elements include: > Fund positioning, open interest, volume > Implied market risk premia (volatility, skew and curve shape) > Percentile historical ranking of current pricing > Seasonality (timing of high/low supply, high/low demand and weather events) Define Universe Determine the fundamental catalyst (the drivers) Apply systematic process to test and refine potential trade opportunities Systematically overlay existing market conditions to provide entry and exit timing Apply fundamental trade selection process Merricks fundamental understanding of why and when this risk premia should exist is a key edge to designing the systematic strategy for the Fund to efficiently capture the risk premia 2

4 Fundamental Price Drivers MERRICKS HAS IDENTIFIED TWO MAJOR FUNDAMENTAL DRIVERS OF MARKET PRICE ACTION The combination of these independent drivers creates a successful process of selection, timing and sizing of profitable commodity trades SEASONALITY > Due to the 6 month growing cycle of agricultural commodities, commodity markets display identifiable seasonal trends based on definable fundamental factors such as crop cycles, weather risk periods and demand patterns. Understanding these fundamental factors and having a repeatable systematic process of filtering, defined entry and exit points, selection and sizing of trades is the key to profitably exploiting these opportunities > The seasonality driver generates trading signals by identifying seasonal trends in outright commodities and spreads and applying a systematic approach to refine the fundamental opportunity set > Aligning the portfolio composition with seasonal trends, by investing during periods with a high probability of risk events, the strategy is able to participate in fundamental events (e.g weather) which provides the portfolio with an asymmetrical payoff where gains are disproportionate to losses POSITIONING > Commodity markets display a strong tendency to react to changes in speculative positioning > The positioning driver uses a systematic process to predict price action using CFTC reported speculative positioning data, volume and open interest. This process identifies crowdedness of market participants and the timing and velocity of money in and out of markets > By aligning the portfolio with money flow, the strategy captures short covering events, aligns the portfolio with market momentum and predicts the timing of market trend changes 3

5 Seasonality Driver OBJECTIVE AND METHODOLOGY > A proprietary program has been built to refine the fundamental assessment of seasonal trends > The following parameters are defined and observed by the program: > Hit Rating number of years with positive return, >80% forms a trend > Average Return average return of the trend in the past 10 years > Volatility volatility of the daily returns in the past 10 years > Sharpe Ratio taking into account average returns, volatility and duration > Upside downside Ratio max cumulated gains over max cumulated loss Each trade is sized according to historical volatility, historical payoff and hit rating > A stop loss is applied at -5% on each individual trade to enhance payoff > As with all sustainable systematic trades, the key to success is having a fundamental prior or expectation of why each trade should work and a fundamental trade selection process to determine which trades are added to the portfolio 4

6 Seasonality SEASONALITY EXAMPLE SUPPLY FACTOR Long April MDEX Crude Palm Oil in USD > Prior expectation: Palm production is at its low point for the year and stocks are tightest > Trade dates : 29 Jan to 19 Feb > Back testing Period : > Hit Rating : 100% (10/10 years) > Average Return : 5.7% > Sharpe Ratio : 3.5 > Holding Period : 21 Days 5

7 Positioning Driver OBJECTIVE AND METHODOLOGY > Merricks has developed a systematic process that uses CFTC positioning data, market volume and open interest to predict price action > When market participant expectations become aligned, speculative positioning becomes crowded. This results in a disproportionate upside/downside ratio. Positioning the portfolio in the right way, in the right market conditions ensures that the portfolio will exploit a change in market sentiment producing an asymmetrical payoff > Absolute change and the rate of change of speculative positioning, volume and open interest provide signals that identify momentum as well as the beginning and end of trends > System conditions are based on weekly changes to CFTC non-commercial positioning, changes in open interest and volume and overall net positioning of non-commercials > The following filters are combined to determine the weekly results: > Winning Percentage > Annualized Return > Max Drawdown > Sharpe Ratio taking into account returns and volatility > Each trade is sized on a score based conviction rating > Portfolio Manager discretion is used to eliminate trades that do not meet the fundamental selection hurdle 6

8 Positioning POSITIONING EXAMPLE 2016 trades for buying Soymeal on Positive Change > Prior expectations: Soymeal shorts were crowded with record net short non-commercial positioning on ideal weather condition in South American despite the crop not yet harvested. Flooding in Argentina triggered a massive short covering rally. > Number of Trades : 15 > Winning Percentage: 67% > Annualized Return: 7.6% > Sharpe Ratio: 1.56 > Max Drawdown: -1.6% 7

9 Performance SYSTEMATIC COMMODITY STRATEGY PERFORMANCE Year Returns Average Net Exposure Average Gross Exposure Annualised Vol Sharpe Sortino Peak to Trough % -14.5% 254.7% 9.4% % % -7.0% 246.0% 9.4% % % 43.2% 263.7% 13.7% % (YTD) 4.20% 18.0% 232.9% 6.2% % 21 * Performance numbers include management fees and administrative cost *Backtest for 2014 is compiled using training data from *Backtest for 2015 is compiled using training data from Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Total % -0.5% -1.7% 0.9% 6.5% -0.3% 3.4% 4.0% 1.4% 7.6% 5.9% 3.3% 31.9% % 1.1% -1.4% -1.8% 1.6% 5.2% 1.8% -0.2% 2.5% 3.8% 3.3% 3.3% 26.3% % -4.1% 2.6% 11.0% 10.0% 0.3% -3.1% -0.7% -1.5% -0.1% 4.9% 1.5% 24.7% % -0.0% 3.6% 0.6% 1.0% % * Performance numbers include management fees and administrative cost Days to Recover 8

10 Performance PERFORMANCE METRICS 9

11 Investment Universe INVESTMENT UNIVERSE > Grains, oilseeds, vegetable oils, dairy, sugar, cotton, energy & livestock INVESTABLE SECTORS > Trading futures SPECIALISTS AND ADVANTAGE > Traders have worked for the large food companies in Australia > Vast industry contacts and experience across the world > Regular travel to view farms, bulk handler operations and meetings with all market participants Commodity Exchange Currency Soft Red Winter Wheat CBOT USD Hard Red Winter Wheat KCBT USD Hard Red Spring Wheat MGEX USD Milling Wheat MATIF EUR Feed Wheat LIFFE GBP Corn CBOT/SAFEX USD/ZAR Soybean CBOT USD Soybean Oil CBOT USD Soybean Meal CBOT USD Canola WCE CAD Rapeseed MATIF EUR Crude Palm Oil MDEX MYR Sugar NYB USD White Sugar LIFFE USD Cotton NYB USD Heating Oil NYMEX USD RBOB Gasoline NYMEX USD Crude Oil NYMEX/ICE USD Ethanol CBOT USD Gas Oil ICE USD Livestock CME USD 10

12 Portfolio Construction POSITIONS PORTFOLIO PARAMETERS EXPOSURE LIMITS Average Number of Positions 40 Target Volatility 10% pa Bull Calendar Spread Up to 100% Average Number of Longs 20 Gross Exposure Up to 4 times Bear Calendar Spread Up to 50% Average Number of Shorts 20 Typical Gross 2.5 to 3 times Cross Border Basis Up to 100% Exposure in the Same Commodity Illiquid Assets 0% Net Exposure Up to 100% Cross Commodity in the Up to 70% Same Geography/ Currency Physical Assets 0% Directional Up to 100% Cross Commodity in Up to 50% Position Limit Different Geography/ Currency Position Stop Loss -5% Total Directional Up to 100% Other Spreads Up to 30% Limit Stop Loss -10% Positions held for 1 week - 3 months Currency Fully Cut all exposure by 100% Hedged 11

13 Risk Management INSTITUTIONAL GRADE SYSTEMS AND INFRASTRUCTURE > Portfolio is monitored with live P&L by the Risk Manager and the CIO > Trading platform including a proprietary portfolio construction system, real time P&L and real time risk/compliance monitoring MERRICKS PORTFOLIO CONSTRUCTOR > Merricks Portfolio Constructor is a proprietary system > Designed to ensure Alpha driven investments are maximized and that risk is correctly measured and understood RISK MANAGEMENT > Weekly Portfolio Risk Report > Bloomberg Portfolio and Risk Analytics > Monthly Commodity Stress Test 12

14 Risk Management WEEKLY PORTFOLIO RISK REPORT OVERVIEW > Runs every Monday > Summary of risk and exposure PORTFOLIO PARAMETERS > Portfolio Parameter vs. Risk limits > e.g. volatility, beta, systematic split, leverage EXPOSURE > Net and gross exposure attribution > e.g. country, sector, deal, security LIQUIDITY RISKS > Liquidity risk of each commodity position > % open interest, % daily volume BLOOMBERG PORTFOLIO AND RISK ANALYTICS OVERVIEW > Bloomberg PORT function RISK ANALYSIS > Risk attribution, scenario testing, VaR 13

15 Summary of Key Terms INVESTMENT STRUCTURE > Australian Unit Trust TERMS FOR INVESTMENT > Applications: Weekly > Management fee: 0.8% pa of the Net Asset Value of the Fund > Performance fee: 20% Performance Fee above 5% return > Valuations: Weekly > Redemptions: Weekly > Minimum investment USD $2 million > Managed Account Min. USD $5 million KEY RELATIONSHIPS > Brokers: JP Morgan, Morgan Stanley, INTL FC Stone & Goldman Sachs > Administrator: Citco Fund Services > Auditor: Ernst & Young > Legal Counsel: DLA Piper Australia, Schulte Roth & Zabel LLP, Walkers (Cayman) INVESTOR COMMUNICATIONS > Net Asset Value produced weekly by Citco > Weekly account statements > Monthly Newsletter > Audited annual financial statements 14

16 Contact Adam Lindell Chief Operating Officer Phone adam.lindell@merrickscapital.com Merricks Capital Pty Limited Level 13, 644 Chapel Street South Yarra, Victoria 3141 Australia Phone

17 Disclaimer This presentation is prepared and provided by Merricks Capital Pty Limited (ABN AFSL ) on a confidential basis for use only by the recipient (as a wholesale client under the Corporations Act 2001 (Cth) and should not be forwarded to others. The information contained in this presentation is of a general nature only and is not to be taken to contain any financial advice or recommendation. This presentation is neither an offer to sell nor a solicitation of any offer to acquire interests or any other any investment. Neither Merricks Capital Pty Limited nor its directors, officers, employees, agents or associates, or any party named in this presentation guarantees the performance of the Funds. Past performance is not a reliable indicator of future performance. 16