Octagon Capital adopts a quantitative approach to investing
and is run by Lam Poh Min and Nelson Chia in Singapore. Poh
Min has ten years of portfolio management experience. Prior
to setting up Octagon, he spent nine years with Singapore's
Government Investment Corporation (GIC). He was a senior portfolio
manager in the quantitative investment unit. Nelson was a
trader at GIC for nine years, working in Singapore, London
and New York.
The Octagon Pan Asia Fund is a trend-following, directional
long/short equity fund that invests across Asia, including
Japan, Australia and India, covering ten markets, 2,000 stocks
and across all market capitalisation levels.
The fund was launched in October 2004 and currently has US$1
million under management.
What are the fund's return and volatility objectives?
We do not set specific return targets but seek to capitalise
on the opportunities offered by the market as they present
themselves. However, we do control the portfolio risk
and generally limit the annualised volatility to 20%.
Our backtest suggests that the strategy can generate roughly
20% returns with that kind of volatility.
- Can you briefly explain the most important variables
used in your price action trending model? And what are the
weightings that you place on each variable?
We analyse price action (i.e. price and volume) from
various perspectives. The key variables are strength and
quality of trend, long- and short-term trend, relative
trend and macro trend. We assign roughly equal weight
to the indicators. Given the marked difference between
uptrends and downtrends in individual stocks, we also
employ slightly different techniques in going long vs
Is this a short-term or long-term model?
It is an intermediate term model, given the non-negligible
transactions costs in Asia. However, we generally find
ourselves holding on to the winners for a much longer
period (2-4 months) vs the losers (2-4 weeks).
- Why did you decide to start with equities and not
another asset class?
We believe the techniques we use are relatively portable.
After all, trends are trends given that we look at them
from a quantitative and statistical standpoint. And we
have used successfully many of these techniques in different
markets and different asset classes over the years. However
we chose to launch an equity long/short fund first. This
is because, while trend-following models are quite commonly
found in the managed futures or CTA arena, they are more
unique in the long/short equity space. Within the Asia
long/short space, managers are predominantly fundamentally
oriented bottom-up stock pickers. Again we felt that our
quantitative approach could offer some useful diversification
to investors within the space. Finally, compared to other
asset classes, the equity markets represent a much deeper
and richer investment universe in Asia and hence the best
way to participate in the growth of the continent.
- With the exception of the short side, is your current
model the same one that you were using at GIC?
The model is very similar to the trend-following models
we were using in GIC. It is designed based on similar
investment principles and quantitative methodologies.
It is different in that it is applied to a much broader
universe of over 2,000 stocks in Asia. This is a meaningful
difference because we firmly believe that the larger and
the more heterogeneous the investment universe, the more
powerful the model is in picking the best independent
How have you changed the long-only model used at
GIC to incorporate shorting; will you incorporate borrowing
costs and availability in the new model?
Although we do not short individual stocks in GIC, we
do express negative views by way of underweighting relative
to a benchmark or using derivatives. Hence the model has
not been changed in any significant way to incorporate
shorting of individual stocks. On the issue of costs and
availability of borrow, given its dynamic nature and poor
data availability, we do not feel there is a satisfactory
way to quantify them at the moment. As such, we take them
into account through our qualitative overlay.
- How much will the qualitative overlay play in stock
We do not override our model. For instance, we will never
short a stock if the model says it is bullish. However,
we do employ a qualitative overlay as it relates to implementation,
particularly on the short side. This is relevant especially
in Asia given the technical constraints. You can say we
use our qualitative judgment to find the best way to implement
and to express the view of the model.
- When will you use equity derivatives and how much
of the portfolio will be allocated to those instruments?
We do not use futures to take directional bets in the
markets, but may use them sparingly for hedging purposes.
However, we do rely on synthetic equity swaps to get access
to certain markets where it may be more efficient to do
so from an implementation viewpoint.
- What sectors will you focus on and are there any sectors
which you will not cover?
We adopt a very broad definition of Asia. Our investment
universe currently consists of ten markets, namely Japan,
Australia, India, Hong Kong, Taiwan, Korea, Singapore,
Thailand, Malaysia and Indonesia. Given the portability
of our strategy, we are constantly looking to further
richen our investment universe. The next market that will
likely be added will be China, which we believe will be
significant going forward. We do not "focus"
on any particular sector or country but will gravitate
to where the best opportunities are.
- In countries where it is difficult or expensive to
short, will you use index futures as hedges?
Yes, we may do that.
What will be your stop-loss policy for when trends
turn? How will you manage and monitor the downside risks
involved in this strategy?
We have strict stop-losses for all our stocks, long
and short. However, we do not employ fixed mechanical
stop-losses of say 10-20% from point of entry. Rather,
the stop level for each stock is identified taking into
account its inherent volatility and logical points of
support and resistance. Ultimately, our bets are sized
such that each position does not cause more than 0.5%
of damage to the portfolio NAV should the stop be triggered.
- How much assets do you currently have and what are
your market travelling plans?
We launched the fund with seed capital of roughly US$1
million from the partners and a few high net worth investors.
So far we have focused on operations and track record
but plan to embark on a formal marketing trip in the first
half of next year.
Lam Poh Min
+65 6325 2870