Pablo Frei - Head of Multi-manager programmes at Quaesta Capital AG

Tackling the question of multi manager selection

Pablo Frei - Head of Multi-manager programmes at Quaesta Capital AG

Quaesta Capital's Pablo Frei explains the art of manager selection to Currency Investor's Richard Willsher

"Understanding managers is like bird watching. If you watch them day in day out for six years then you understand how they will behave. You know what you can expect from them."

Achieving sustainable returns in active FX investment management is difficult to do. Choosing a fund of funds or an indexed approach based on a consistent strategy can provide the answer but selecting the construction of these presents a significant challenge.

Addressing the scale of the problem, Pablo Frei of Quaesta Capital explains, "Out of the 200 managers that we track, only twenty or thirty have demonstrated that they can earn sustainable returns."

He adds that managers may have strong business models and well wrought strategies, their teams may be made up of bright, highly educated people or traders and analysts with long experience but none of these qualities guarantees that they will earn money from FX. They may, for example, have great strategies but weaknesses in their approach to risk management. Moreover timing is key. "Scaling back, getting into or out of the market - this is what often makes managers successful," says Frei.

Grouping managers

The process of grouping managers to ensure dependable results from a fund of funds or index inevitably starts with an understanding of clients' goals.

But an early consideration is how to do so considering the array of differing strategies on offer to those clients - systematic, short term, long term, discretionary, fundamental, carry, technically orientated and so forth. Experience has led Quaesta to assemble managers into three groups:

1 Beta oriented - they earn good money in low risk markets. Quaesta refers to these as "global growth managers." This is a "short gamma" approach. They have a positive correlation to traditional investments and globally diversified portfolios.

2 Momentum driven - opposite of beta driven. These managers do best when the markets are stressed. If volatility soars, investors panic and liquidity dries up, these managers tend to perform well using a "long gamma" or "momentum" style. Consequently this approach tends to perform well over longer terms and effectively offers portfolio insurance.

3 Market neutral - these managers use their own model that can switch from risk seeking to risk averse and therefore they are independent of most conventional asset markets. They show hardly any correlation with other asset markets or economic trend. They can earn money in slow markets but also in very volatile ones. And of course they can also lose money in both market environments.

Clients seeking to gain FX exposure can choose which of these groups of managers to invest with. Quaesta has formulated an index to map each of these requirements.

Citibank has chosen Quaesta Capital as their provider of active FX style indices and offers the three indices to investors on its CitiAccess platform.

Adding value

"Our added value for an investor," says Frei, "is that we have monitored the market comprised of these 200 managers for more than six years. At the outset we carry out a very rigorous due diligence procedure and then we continue to closely monitor them on an ongoing basis. Quaesta invests in managed accounts with each manager so we know exactly the state of play with each of them, the amount of leverage for example, their overall positioning and so forth. The high level of liquidity in the market as a whole enables us to react immediately if we need to. So we know the players. We know how they have developed. We know what we can believe and what we can't. We know which managers do well in which environment and how to structure such a portfolio. My daily business is monitoring the FX managers. It is like bird watching. If you watch them day in day out for six years then you understand how they will behave. You know what you can expect from them."

Investing clients are drawn from professional investors, from pension funds, consultants, sovereign wealth funds, high net worth individuals, family offices and corporates. The funds themselves are managed from a discreet selection of managers.

Whereas Quaesta's flagship FX Multi-Manager Program typically employs a dozen managers, their three indices - Global Growth, Momentum and Market Neutral - tend to comprise as few as five managers with consistent performance and which follow a suitably solid risk management metrics within their fund. From a risk standpoint the funds offer the further layer of risk protection that arises firstly from Quaesta's due diligence and then from the removal of dependence on a single manager.

This approach to fund selection is rigorous, detailed and diligent. With 200 managers to choose from and so few performing well at any one time, the challenge to produce returns appropriate to a chosen fund strategy remains a tough taskmaster at all times and under all conditions.