InnoFusion Capital Management runs a multi-strategy fund focused in relative value/arbitrage strategies. The fund invests in a wide range of asset classes and financial products, including equities, fixed income, convertible bonds, commodities and derivatives. During the last 10 years, the fund return 14.35% per annum with very low correlation to various markets and asset classes.
- InnoFusion Asia Multi-Strategy Fund utilises an absolute return strategy that boasts low correlation to traditional asset classes. Please give us a brief introduction to your fund and the background of key personnel, in particular your journey from particle physics to the world of hedge funds.
Prior to founding InnoFusion Capital Management in 2005, I was Head of Structured Products at KBC. Before that I ran derivatives trading in UBS’s Global Equity Derivatives Team. During my career at KBC and UBS, I traded many trading/arbitrage strategies on a wide range of derivatives and financial products in the region. My educational background is in particle physics and it was during my final years of working on my doctoral thesis at Columbia that I became interested in the financial industries. The period was marked by many debates around the LBO boom, which inspired me to start reading up on modern financial theory. In the end I decided to pursue a career in the financial field after I finished my Ph.D. Our investment approach now uses many of the techniques used in particles physics combined with knowledge from my years of experience in trading various financial instruments in different markets.
- What are the key features of InnoFusion’s multi-strategy approach to investing? How does that distinguish your fund among its peers in the Asian hedge fund industry?
Being a multi-strategy fund, we are able to tactically allocate our capital to various strategies as the opportunities arise. Investing in a wide range of asset classes and financial products enables us to capture opportunities that appear in different markets and under different market conditions. To be successful in capturing the opportunities, we rely on our proprietary Screening Systems to screen out opportunities in a wide range of asset classes and different markets. Following the screening process we use our Quantitative Models for valuation, and finally a sophisticated execution platform for execution. Strength in quantitative analysis and computer programming combined with extensive experience in trading a wide spectrum of financial products in Asian markets allows our team to develop and utilise a unique investment approach within the industry.
- The fund invests across a range of asset classes as part of its multi-strategy approach to investing. What determines your asset allocation mix, and with regards to your exposure across the fixed income and volatility space, what have typical trades looked like?
Our allocations are typically driven by the opportunities presented. Different opportunities appear in different market conditions. For example, from the time running up to and during the financial crisis in 2008, there were many opportunities in volatility related strategies. After the 2011 introduction of the offshore Renminbi market in Hong Kong there were various relative value / arbitrage opportunities, including the opportunities in the Renminbi forward curves. Generally, these strategies have low correlations to each other and work together to reduce the return volatilities of our portfolio.
- The InnoFusion Asia Multi-Strategy fund was up roughly 16% in 2008 and 47% in 2014, in what has been difficult years for the average hedge fund globally. Considering this significant outperformance, could you shed some light on this against the backdrop of your proprietary investment model and how it generated winning signals for your team?
2008 was an exceptional year for our funds’ performance. About half of our return came from Volatility Arbitrage and Convertible Arbitrage, and the other half of the return came from Share Class Arbitrage. The strategies were market neutral and generally would be benefited from a high volatility environment. Another very good year for us was 2014, in which we made a return of 47% for the year. During that year, several arbitrage strategies which we had been running for several years all converged to their fair values. We were able to realise the profit within that same year, which lead us to the 47% return for 2014.
- Leading from the previous question, 2013 and 2010 were relatively good years for the average hedge fund globally, however the InnoFusion multi-strategy fund appears to have wobbled during these years. How is it that your fund delivers exceptional returns during bad years while performance in relatively supportive markets can be comparatively muted?
You have raised an interesting point. One important aspect of an arbitrage trade is that mathematically I can tell you where the fair value of a trade is. If I can enter a trade at a discount to fair value, I know eventually the trade will converge to its fair value and I can realise my profit. Such characteristics make an arbitrage trade inherently very low risk. On the other hand, even though an arbitrage trade will eventually converge to its fair value, there is no way of predicting when that will happen. 2010 and 2013 were years where some of our strategies are converging, while some other strategies had moved further away from the fair value temporary. As a result the net return was reduced for the year. But we were holding a position which was of better value than that of the time we entered into the trade. This was also the reason we saw an exceptional year in 2014, during which many of our strategies converge within the year for us to realise the profit.
- Lastly, with fears of another full blown financial crisis abound in the markets, what is your expectation regarding the global and in particular the Asian markets in 2016? How well is your fund positioned for a possibly tumultuous year ahead?
I don’t think there will be a full blown financial crisis coming in 2016 but I do expect more volatility for the rest of the year. It is true that unfortunately China is taking some steps backward in terms of opening up the capital account and developing the capital market, but in the longer term I am very positive about the future growth of the Chinese economy. It’s inevitable that there would be some challenge and volatility in the short term as China works to rebalance its economy while as the same time pursuing an anti-corruption campaign. As for our fund, since most of our strategies generally benefit from a high volatility and shifting regulatory environment, we are in fact very positive on the return outlook of our fund for 2016.