Alder Capital – the best performing unit linked fund?

Currencies

Hi Homer,

Don't include me in the double-digit return camp. I have said throughout the thread that good-quality currency managers may be able to add very small amounts of value on a reasonably consistent basis. That's all.

I meant to say at the outset that I don't condone for a second comparing Alder Capital's 2001 return with unit-linked funds generally and determining that it was the "best performing" blah blah. Another case of apples and oranges and sadly (as Mith would say) more <!--EZCODE BOLD START--> nonsense<!--EZCODE BOLD END--> from the pen of Niall Brady. What you'd need to do is compare Alder's return with that of other currency funds taking similar levels of risk, not with equity, bond, and property funds.

Currencies

Hi Dynamo

I wasn't suggesting that everbody bought into the double-digit return camp. There has been plenty of reasoned argument by you and others about what it might be reasonable to expect from currency funds.

My posting was intended as a wry comment on the eternal appeal of the 'easy buck' and how we would all like to believe that such a thing exists.

Homer

I met with Mark Caslin and Brian McCarthy of Alder Capital yesterday and here are my observations:

First let me say that I don't have the training and resources necessary to evaluate what they are doing properly so I am putting up these comments and questions for critical analysis.

<!--EZCODE BOLD START--> What I learnt<!--EZCODE BOLD END-->
My starting point was that the currency markets must be efficient and they suggested that the stockmarkets were not efficient. There is a precise formula relating the spot and future price of two currencies and their interest rates. For some currency pairs, the actual future price varies from the theoretical future price and maintains this variance for a long term trend - therefore the markets are inefficient.

They have studied these trends with mathematical models developed in-house and discovered statistically significant trends over 4 week periods. The same models show no trends whatsoever in shorter periods, so day trading of currencies cannot produce consistent profits. The same models show no trends at all in the stockmarkets.

Alder are not currency traders buying and selling currencies throughout the day. They identify long term trends and buy when these trends indicate undervaluation of a currency.

They agree that currency is a zero sum game. However, businesses and central banks are not profit maximizers and are prepared to pay a premium for certainty. This results in inefficiencies.

There is no catastrophe risk with Alder. They do not use excessive leverage of very small arbitrage situations which might blow up in their face. They buy and sell currencies forward without leverage. ( I am not sure of this).

Alder are fund managers. They do not handle the cash themselves. For example, if you invest in the Friends First Fund, Friends have custody of the money at all times.

Their management fees are 2% a year + 20% of the excess over 7%. If the fund declines in value during the year, they get no performance fee until the fund has exceeded its previous high. So it's not a case of being rewarded well in the good years and paying no penalty in the bad years.

The returns so far:
1995…..61%
1996…..21%
1997…..18%
1998…..1%
1999 only traded between January and April and earned 18%
2000 only traded between October and December and earned 6%
2001…..11% in their Global 10 Fund
…..18% in their Global 20 Fund - A higher "risk" fund
..14% in their Friends First Insight Currency Fund between March and December

<!--EZCODE BOLD START--> Questions/What I don't understand<!--EZCODE BOLD END-->

I have no way of knowing if this past performance is random or not. There seems to be increasing evidence of exploitable trends in the currency markets (according to Shane Whelan in a report for Hibernian Investment Managers). If such trends exist, then Alder <!--EZCODE ITALIC START--> could<!--EZCODE ITALIC END--> be profitably exploiting them.

Even if there has been a trend in the past, there is no guarantee that it will continue.

There are many thorough reports to show that past performance in the equities markets says nothing about future performance. Do such reports exist for the currency markets? Or do currency fund managers as a group outperform equity managers? Or do currency managers go through good patches only to revert to the mean eventually?

There seems to be no independent verification of Alder's performance and methods.

In the absence of such verification, I looked to see what the Dublin investment community thinks of them and the answer seems to be that they don't think very much of them. They have presented their case to all the fund managers and all the actuarial consultancies around the country and they have very few clients so far.

What is the real risk of the fund? They say that there is virtually no catastrophe risk - it's not like LTCM whereby a rare, but expected event, will blow them out of the water. But yet the minimum investment is £50,000 and they describe it as a risky investment.

<!--EZCODE BOLD START--> Volatility<!--EZCODE BOLD END-->
In their presentation they use risk when they mean volatility. And they show that their fund when mixed with an equity fund reduces the volatility. That is of no interest to me as a long term investor. I am only interested in the long term return. But I appreciate that reducing volatility would be of interest to other investors.

<!--EZCODE BOLD START--> Tentative Conclusions<!--EZCODE BOLD END-->

Trading currencies is a zero sum game. Outperforming by 25% a year is extraordinary. I don't understand it and so I am still sceptical. I am not saying it's not possible - I just amn't convinced.

A few years ago I was sceptical of Eagle Star's short term outperformance. If they had presented their case as having some magic ingredient, I wouldn't have believed them then and that scepticism turns out to have been justified.

In the end, I would not recommend this fund until I saw some evidence that currency funds can and do consistently outperform the market. I would have to see some independent critical assessment of Alder by someone better qualified to do so.

There is some marketing information on the fund

<!--EZCODE ITALIC START--> Link formatting corrected by RainyDay<!--EZCODE ITALIC END-->

You did real well, <!--EZCODE ITALIC START--> Boss<!--EZCODE ITALIC END-->, even a good lunch didn't swing you against your better instincts.

One quote springs out:<!--EZCODE QUOTE START--><blockquote>Quote:<hr> <!--EZCODE ITALIC START--> "They agree that currency is a zero sum game. However, businesses and central banks are not profit maximizers and are prepared to pay a premium for certainty. This results in inefficiencies. "<!--EZCODE ITALIC END--><hr></blockquote><!--EZCODE QUOTE END--> That is completely and deliberately missing the plot. The price of currencies is decided at the margin by the speculators taking into account all known information.

Let me explain. Imagine that <!--EZCODE ITALIC START--> Dim<!--EZCODE ITALIC END--> announced to the world that he was goin' to pay 1$ for very € for the forseeable future. Total madness of course as the € is only "worth" about $.88. But the existence of a mad buyer would simply push the price of the € up to 1$, forget about the fundamentals. The only way that the speculators can make money here is if they have advance warning or insight into the madness and could buy the € before everybody else found out about the mad buyer.

This is the central argument; it doesn't matter how many irrational traders there are in the currency, in a perfect market the price will settle at a level which yields zero profit despite the existence of irrational traders.
In summary, a currency fund's only claim to make profits is that it is smarter than the other currency funds. To claim that there are inherent biases within the underlying fundamental suply and demand which allows all the speculators to reap risk free easy pickings is totally unsustainable.
:rupert

Hi Rupert

This was certainly my starting point in my discussions. Currencies must be a perfect market. But Alder came up with a graph showing that there was a significant divergence of forward rates from their theoretical rates. It seems a reasonable argument to me and I don't know enough about currency trading to challenge it.

Theoretically the currency markets are efficient, but in practice they are not?

Brendan

Re: bullfaeces, Boss

Are they saying that even if they were pretty mediocre currency traders there is money for old rope here, enough to go round all the currency funds, even the mediocre?

Or, are they saying that they are such smart cookies that they can spot the arbitrages in time before the other currency speculators close off the arbitrage?

This talk of arbitrage in the forward market is absolute faeces. The forward rate of a currency is determined by an absolute formula linking the spot rate, the forward rate and the respective interest rates. Even the dumbest speadsheet can calculate that, or are they claiming some arbitrage between their spreadsheet facilities and those of the other speculators?

The forward rate is mathematically identical to the spot rate adjusted for interest rate differential. The fact that these posers shift the ground to talk about discrepancies in forward rates, hoping to blind us all with science, disgusts me to the core and only convinces me of my primary argument; there are no arbitrage opportunites in the currency markets which any particular player, no matter how many Ph D's or Nobel Prizes, can consistently exploit.
:rupert

Re: bullfaeces, Boss

Hi Rupert

I should have brought you along to the meeting !

What surprises me is that they have been presenting this around town for the past year or so. I can't find any public review of or challenge to their presentation. But there have been very few people taking them up either.

Brendan

Re: bullfaeces, Boss

Hi Rupert

I might be misunderstanding their argument that the market is inefficient. I will follow up on it and report back.

I don't think that they are charlatans - they certainly believe in what they are doing. They may be mistaken and their performance may be due to randomness alone, but they do believe that they have a sustainable edge.

They wrote an article entitled <!--EZCODE ITALIC START--> Reducing effect of FRS17 on your scheme<!--EZCODE ITALIC END--> in the Irish Pensions Magazine in November 2001. I don't know if these articles are submitted to any form of peer review - I suspect not. But the readership of the magazine would be pretty informed and should have challenged the article. Maybe we will see a challenge in the next edition.

Brendan

Re: Reducing the effect of FRS17

Well, I can believe that one, <!--EZCODE ITALIC START--> Boss<!--EZCODE ITALIC END-->. <!--EZCODE ITALIC START--> Boots<!--EZCODE ITALIC END-->, found an even surer way of escaping short term <!--EZCODE ITALIC START--> FRS17<!--EZCODE ITALIC END--> effects, put the lot in cash.:rolleyes

I cannot dispute that investment in alternative vehicles will reduce short term volatility - its called diversification.

One presumes they are arguing that this reduced volatility is not at the expense of reduced performance.

Looking back over this thread I noticed that they claimed to make 61% in 1995.
What?; from currency trading alone?!
Now, even with luck, that <!--EZCODE BOLD START--> is<!--EZCODE BOLD END--> impressive. Can they give us any insights into broadly what went so spectacularly right for them in 1995? I am sure that won't reveal any secrets but might give the doubters like me (and you, <!--EZCODE ITALIC START--> Boss<!--EZCODE ITALIC END-->) some sense of how they make money out of a zero sum game.
:rupert

Re: Reducing the effect of FRS17

The only sure way of reducing FRS17 volatily (while maintaining a defined benefit pension scheme) is to invest in fully matched assets. This implies investment in AA corporate bonds of suitable term and currency. This is what Boots did.

As to whether the arguments in the article Brendan refers to stand up, I wouldn't necessarily agree that readers of the magazine will automatically challenge anything that doesn't stand up. There may well be a response, or people may be too busy preparing FRS17 returns to study the article in detail, or the wording may be too vague to allow direct criticism.

For example, the article probably includes a statement along the lines that increasing diversification will reduce volatility. That's hardly rocket science, but most people would agree with the statement. Whether using currency funds in conjunction with equities can significantly reduce volatility without also significantly reducing expected returns remains to be proven, and I would be among those who would be highly sceptical of this assertion.

Homer

Alder Capital

Listen folks, what's the point in Alder replying if we're going to lash into them. I stll don't see why currency trading which is a simply huge trading area can be described variously as 'posers' and using 'absolute faeces'. What of the Central Bank authority provided?

This certainly never aroused such comment here before. Perhaps its something to do with it being a local firm. But it's a little difficult, and somewhat embarrassing to ask a commercially busy firm to engage in this standard of debate. If I was them I wouldn't bother, seriously. If they've got something that works, business and performance on the scoreboard is where I'd concentrate. I'm sorry the thing twisted so.

Re: Mith's Censure

<!--EZCODE ITALIC START--> Mith<!--EZCODE ITALIC END-->, it is clear from an earlier posting that you see some merit in these currency fund things and may even have advised folk into them (clearly in good faith).

However, it is a little rich for you, of all people, to sanctimoniously censure the subsequent criticism of the concept for the colour of it's language and it's lack of patriotism.

You are well noted for favouring foreign players over the domestic market. And when you decide you are against something (which others in good faith support) the colour of your satirical metaphor is of Van Goghian proportions.
<!--EZCODE QUOTE START--><blockquote>Quote:<hr> "If they've got something that works, business and performance on the scoreboard is where I'd concentrate."<hr></blockquote><!--EZCODE QUOTE END--> I didn't think you were a big supporter of past performance.

The <!--EZCODE ITALIC START--> Boss<!--EZCODE ITALIC END--> reports:<!--EZCODE QUOTE START--><blockquote>Quote:<hr> <!--EZCODE BOLD START--> <!--EZCODE ITALIC START--> "Their management fees are 2% a year + 20% of the excess over 7%." <!--EZCODE ITALIC END--><!--EZCODE BOLD END--><hr></blockquote><!--EZCODE QUOTE END--> Would these charges pass the "saverkite" test?
:rupert

Re: Mith's Censure

Lads(?)

This is a very interesting and important subject which I am anxious to get to the bottom of. Please don't vere off into a slagging match of each other or of Alder.

Alder claims a fantastic performance. It's only right that these claims be challenged and defended.

I can find no independent assessment of Alder, so this debate on Askaboutmoney fulfills an important purpose.

I can find no informed debate on currency funds anywhere on the web, but I am still looking.

Maybe Alder has a reliable, consistently outperforming strategy or maybe they are being fooled by randomness. The debate is still open as far as I am concerned. I think it is only right to remain sceptical and withhold investing until there is some genuine evidence to the contrary.

I know the point you are making about them being Irish. How could we Paddys come up with something as brilliant as this. For my part, if an American firm were making the claims they are making, I would just put the phone down. I have met the lads and I know others who know them - they are not some boiler room operation; they don't have a criminal record for scamming people; they are undoubtedly very clever; but that doesn't mean that they are not being fooled by randomness.

Brendan

Brendan

Encouraging Debate

Rupert, and Brendan, I think you missed my point.

Rupert clearly is a highly informed fellow. Brendan has met Alder. These are very important ingrediants, to any informed debate. But that's not the point. I was simply being practical.

If we are to secure AAM as a place where the likes of Alder and others will be encouraged to participate, we need to create the environment for doing so. I've posted many times before on the annonymous nature of AAM which is both a strength and a weakness. On the weakness side it can turn off participants, who could otherwise share important information, because they feel they're walking into a one sided bear trap, where they're visible and others aren't.

We appeared to be going that old road again. I didn't mean, and I opologise if it sounded sanctimonious. It's just I know how it feels, and if I was Alder I might consider just ignoring AAM altogether. That's all. Please don't read anything else into it.

Re: Getting the debate back on track

Sorry, <!--EZCODE ITALIC START--> Boss<!--EZCODE ITALIC END-->, lost the run of myself.

I am still somewhat confused about the nature of this fund, which, <!--EZCODE BOLD START--> honestly<!--EZCODE BOLD END-->, I had never heard about until the opening of this topic.

You report:<!--EZCODE QUOTE START--><blockquote>Quote:<hr> <!--EZCODE BOLD START--> <!--EZCODE ITALIC START--> "The returns so far:
1995…..61%
1996…..21%
1997…..18%
1998…..1%
1999 only traded between January and April and earned 18%
2000 only traded between October and December and earned 6%"<!--EZCODE ITALIC END--><!--EZCODE BOLD END--><hr></blockquote><!--EZCODE QUOTE END-->A couple of questions spring to mind. As already alluded to, why the spectacular results in 1995 from mere currency trading? More puzzling, what sort of beast is this that can turn itself off and on through 1999/2000 and then finally off for 2001.

You also report:<!--EZCODE QUOTE START--><blockquote>Quote:<hr> <!--EZCODE BOLD START--> <!--EZCODE ITALIC START--> "Their management fees are 2% a year + 20% of the excess over 7%. If the fund declines in value during the year, they get no performance fee until the fund has exceeded its previous high. So it's not a case of being rewarded well in the good years and paying no penalty in the bad years."<!--EZCODE ITALIC END--><!--EZCODE BOLD END--><hr></blockquote><!--EZCODE QUOTE END--> Let's see now, that means they made approximately 16% :eek management fees in 1995, 6% in 1996, over 5% in 1997, only 2% in 1998, 5% for three months trading in 1999, and back to only 2% for three months in 2000, and since???

Now, all my suspicions about these things start to come to the fore. During the good (lucky?) times, very rich pickings indeed for the managers. Then when the tide (luck?) turns, time to pack the bags. The fee structure is very asymmetrical. It encourages making high bets and no real pain when it goes wrong.
:rupert

Currencies

Hi Folks,

Meant to post on this yesterday but didn't get a chance, and I see the debate has moved on (well, maybe not).

Back to basics. Rupert, you're right in your description of the relationship between spot and forward rates. No exploitable opportunities there.

However, the currency players disagree about the zero-sum game. Yes, it's a zero-sum game in the sense that one participant's profits inevitably equate to another's losses. But it's not a zero-sum game in the sense that not all participants have the same objectives, therefore all can be happy with an outcome even if someone has apparently "lost".

How does this work in practice ? Not in the way you suggest. Even when they're defending currencies, Central Banks don't stand up and announce that they are buyers of a given currency at any price for any period. It's a lot more subtle than that.

Let's look at Ryanair's recent announcement. Micko has effectively announced that he's a buyer of $5 billion (presumably funded by €) in the foreseeable future. He has a $/€ rate at which the deal works, and will buy the $ at or better than that rate. He's seeking as much price certainty as possible, and doesn't mind giving some profit to someone else to get it.

The currency players hire smart people to analyse currency trading and investment flow data and derive expectations as to future prices. Factor in the Central Banks, which as I have said before are consistent losers (occasionally massively so), and the fact that currencies display strong momentum trends (perhaps because desired-hedgers increasingly get flushed out as the price moves against them0, and you have a background in which I can accept that smart analysts can make money in currency markets, as long as they account for a relatively small portion of that market. I've attached a link to an article by Neil Record of Record Treasury Management where he estimates currency overlay managers to be only around 1% of the total currency market - the opposite to Brendan's supposition on the make-up of the market, by the way.

It's not a free lunch. It may be highly risky. It requires expertise and a lot of analysis. You can lose money. But it may be a legitimate investment strategy for the right type of client. I have seen it in action in the institutional world in the US, where large pension funds hire currency overlay managers to squeeze out very small levels of return in a highly risk-controlled fashion. Alder is aiming at the retail world, via a hedge fund, and must be taking far riskier strategies to generate the returns they have got. If they do return to AAM, I'd like them to focus on the risks they take within the portfolio, and how precisely they have generated the high returns.

As for the fees, they're typical of the hedge fund world, and (as I have argued in a different context) you get what you pay for. Hedge funds are an in-demand area and hence can (and do) charge a very high price for their services. If you don't like the price, you don't have to play.

Re: At Best a Plus 1.9% per annum game

Very interesting paper, <!--EZCODE ITALIC START--> Dynamo<!--EZCODE ITALIC END-->. It is almost as if <!--EZCODE ITALIC START--> Neil Record<!--EZCODE ITALIC END--> was following our thread. (Easy read, <!--EZCODE ITALIC START--> Boss<!--EZCODE ITALIC END-->, I recommend it to you.)

His opinion, and he admits that it is just an opinion, appears to me to be that every day the <!--EZCODE ITALIC START--> Ryanairs<!--EZCODE ITALIC END--> of this world want to close off a big currency transaction and not too fussy about perfect price. My problem with this argument as you had put it. <!--EZCODE ITALIC START--> Dynamo<!--EZCODE ITALIC END-->, was that in a perfect market (and as <!--EZCODE ITALIC START--> Neil<!--EZCODE ITALIC END--> himself says, none more perfect than the currency market) all the speculators would know about it and quickly close off any arbitrage oppportunity. <!--EZCODE ITALIC START--> Neil's<!--EZCODE ITALIC END--> rebuttal of this efficient market hypothesis seems to be to accept that while everybody will know about the forced trader, only the "overly managers" will have the nerve to exploit it.

Of particular interest in the paper was the survey analysis which was approached in what appears a very objective manner. In particular, he alludes to the possibility of "survivor bias", a particular hobby horse of mine.

Subject to caveats such as "survivor bias" and 3 out of 17 declining to take part in the survey, he finds a statistically significant added value of 1.9% per annum from these "currency overlay" managers.

Now let's return to the Topic. If all <!--EZCODE ITALIC START--> Neil<!--EZCODE ITALIC END--> can point to in a caveated survey of the top currency overly managers is an added value of 1.9% p.a., I ask the following questions.

<!--EZCODE BOLD START--> HOW IN THE NAME OF HECK DID ALDER MAKE 61% IN 1995 AND HOW CAN CURRENCY PLAYERS AS RULE HAVE THE NECK TO CHARGE 2% + 20% FOR WHAT AT BEST IS A PLUS 1.9% GAME??"<!--EZCODE BOLD END-->:eek

Currencies

Hi Rupert,

Glad you enjoyed the Neil Record paper. Just a quick response on a couple of points.

1. I assume (though it's not stated) that the 1.9% added value is net of fees.
2. I'd suggest that not many people have the ability, the information, the motivation, the resources, and the nerve (rather than just the latter) to exploit the inefficiences. Your choice of words suggests that it's easy but risky; I'm inclined to think it's not easy and it's risky.
3. Record's firm is an overlay manager as I described it - aiming for small but consistent value added over a tight risk-controlling benchmark. Alder is a hedge fund with a much riskier (and potentially much higher return) strategy.

But your question is valid. And it's the one I would also put to Alder, if slightly more politely. <!--EZCODE ITALIC START--> What are the risks they take within the portfolio, and how precisely have they generated the high returns.<!--EZCODE ITALIC END--> Does anyone have any data on other currency hedge funds, so that we might compare a sample of similar managers ?

Alder

Best debate on a real financial topic for a long time- some quality contributions.

I saw the Alder guys present some time back and found them hugely impressive.As someone with considerable experience in the fund management business I feel equipped to comment that they really know their subject inside out and we did give their proposition serious consideration.

Having met several outfits engaged in the Hedge business( and make no mistake Alder is a hedge fund) here are a few observations of my own ;

-trading is a zero sum game

-the assymetrical nature of the fees should rightly turn off investors

- yes,there is a real problem with past performance because of the lack of verification and the well-observed survivor bias

According to an article in the FT (12/12/01),work done at Reading University shows that 59.5% of hedge funds survived to their 5th anniversary.
It also showed that the rate of attrition was increasing with 12.3% of funds failing to reach their 1st anniversary.

If the under-performing funds folded tent the figures for pension fund performances would look very different !

There has been a lot of analysis presented to Conferences etc which shows an attractive risk/reward trade-off based on the lack of correlation between currencies or other 'alternatives' and 'mainstream' assets.In my opinion this is fundamentally flawed because the reward numbers are not credible.

I want to state that I am not questioning the veracity of the performances claimed by the Alder guys, with whom we were highly impressed.

Re: A Great Debate that is actually shedding some light

<!--EZCODE ITALIC START--> Boss<!--EZCODE ITALIC END-->, <!--EZCODE ITALIC START--> Corncrake's<!--EZCODE ITALIC END--> contribution and the link provided by <!--EZCODE ITALIC START--> Dynamo<!--EZCODE ITALIC END--> have certainly made my humble participation in this GD very worthwhile for me.

Let me reiterate that I never heard of <!--EZCODE ITALIC START--> Alder<!--EZCODE ITALIC END--> before this GD and I do not know the principals. However, I am perfectly prepared to accept the glowing character references bestowed upon them by yourself and others. I have absolutely no doubt that they are very honourable, smart guys who believe they have a formula and who have got the formula to work (except 1999 to 2001 still look patchy to me). Hence I regret any offence which some of my earlier outpourings may have caused.

Where am I now?

I accept that there may be slivers of inefficiency in the currency markets and given their near perfection and liquidity, ironically that might allow such slivers to be exploited for profit.

However whilst the game is above zero for those who have the required know-how it is only very slightly above zero as that report shows. Excessive returns will require excessive risk taking and therefore luck.

I believe the fee structures in this context of 2%+20% are inappropriately high and not conducive to a convergence of the client's and the manager's ineterests.

But the most enlightening revelation of all is this "survivor bias" factor which must be explaining why these Hedge Funds all look so good. Of course they look good. As soon as the make-up wears off in this game your thrown off the stage.

I think the increasing appearance of and the misleading presentation of Hedge Funds in the retail sector (the big boys can look after themselves) is bound to backfire, just a matter of time.
:rupert