Managed futures isone of the few alternative investment strategies that tends to demonstrate negative correlation to traditional investments during

Managed futures isone of the few alternative investment strategies that tends to demonstrate negative correlation to traditional investments during stress periods for the equity markets, says Troy W. Buckner, managing principal of NuWave Investment Management, and thus offers true diversification when it's needed most.

GFM: What is the background to your company and fund?

TB: NuWave Investment Management specialises in quantitative trading strategies and their application to financial and commodity markets. The firm offers diversified directional futures methodologies, as well as equity long/short market-neutral strategies, and manages total assets in excess of USD500m.

The firm was launched in early 2000 in an effort to capitalise on directional trading opportunities frequently missed or ignored by long-biased investors and most hedge funds. Since its inception, NuWave Investment Management has combined ingenuity, insightful research and cutting-edge technology to navigate successfully the complexities of global investing.

Our multistrategy, pattern-based approach to investing in many of the world's most liquid financial and commodities markets offers investors the potential to achieve compelling risk-adjusted returns in a variety of market environments, while also providing significant diversification and non-correlation benefits relative to both traditional investments and other hedge fund strategies.

The firm's systematic trading methodologies employ a sophisticated form of 'pattern recognition' theory to identify and capture repetitive historical tendencies in price movement that occur across a broad array of markets and time horizons.

The repetitive nature of these patterns results from a wide variety of technical and fundamental factors, including prospects for global economic growth, the prevailing environment for interest rates, the effects of dramatic geopolitical shocks and the cyclicality of seasonal or weather-related concerns.

GFM: Who are your key service providers?

TB: NuWave maintains its primary futures clearing relationship with Newedge and a prime brokerage relationship for its equity trading with Goldman Sachs. Audit services are conducted by Rothstein Kass. Administration services are provided by AIS Fund Administration, while US legal counsel is Kleinberg, Kaplan, Wolff & Cohen and offshore legal counsel is Appleby (Cayman Islands).

GFM: Have there been any recent key events, such as fund launches or changes to the management team?

TB: Craig Weynand recently joined the firm's management committee as managing director of business operations and will assume a senior leadership role as NuWave continues to strengthen its management team and enhance its operational infrastructure. He has spent nearly 20 years in the alternative investment industry including key management positions at Graham Capital Management and Campbell & Company, after more than 13 years at Morgan Stanley.

On the product side, we continue to respond to investor demands for enhanced transparency and increased liquidity by offering managed accounts, as well as introducing weekly liquidity into our fund vehicles.

GFM: What is the profile of your client base?

TB: NuWave seeks to attract a client base that is well diversified by investor type and geography. Presently, the firm's investors include pension funds, fund of funds, family offices and private institutions. Almost 60 per cent of our assets originate from the US, while with the remainder primarily from Europe and Japan.

GFM: What is your investment process?

TB: NuWave employs a rigorous and disciplined investment process. The firm defines a matrix of logical and mathematical values associated with a given market's time series in order to define a 'profile' of current price activity for that specific market. Thereafter, pattern recognition algorithms are used to sift through time-series data, with the goal of identifying historical analogies from which to predict directional price behaviour.

Although no two profiles are identical, similar profiles can be identified from which one may infer directional price opportunities. These opportunities often differ significantly, varying in terms of duration from mere hours to many months and direction, at times running with the prevailing trend, while at other times running counter to the prevailing trend. The result is a return profile distinct from and less correlated with those of traditional investments and other hedge fund strategies.

GFM: How do you generate ideas for your funds?

TB: At NuWave, we pursue a dynamic approach to research in which academic and market-based initiatives are vetted, modelled and simulated within the confines of a proprietary research and development platform. This enables researchers to design virtually any conceivable price-based investment strategy or risk management tool consistent with our basic theory of repetitive market tendencies.

Full-scale Monte Carlo simulations aid in the modelling process and help ensure a robust statistical result. Virtually every aspect of trading and risk-management can be modelled, simulated and customised, including signal generation, risk control, position sizing and trade execution. Specific sub-models may be isolated for further study or independently stress-tested, or the characteristics of multiple sub-models may be modelled simultaneously with an eye to enhancing the risk-adjusted returns of the overall portfolio.

GFM: What is your approach to managing risk?

TB: History tells us that investing in the global financial and commodities markets is at once fraught with uncertainty and opportunity. Careful attention is paid to a variety of risks, including market risk, portfolio risk and execution risk. The firm's strategies identify complex relationships across an increasingly interdependent world, while seeking to capture significant directional price movements in a variety of commodity and financial markets.

The firm utilises volatility as a key component in determining a wide variety of proprietary parameters for an individual market, and individual market exposures are managed in a manner that attempts to equalise risk across all positions. Portfolio construction includes multiple sub-portfolios that trade short, intermediate, and longer-term cycle lengths.

Exposure is acquired opportunistically according to model-based forecasts. Multiple constraints exist to minimise aggregate risk across the entire portfolio, especially when unique markets begin moving in tandem. Value at risk measurements, sector concentrations, individual market exposures, stress-test findings and overall leverage are each constrained within acceptable levels.

GFM: What opportunities are you looking at right now?

TB: We anticipate that market volatility will remain high for the foreseeable future and that unprecedented global stimulus and central government borrowing will result in stock, bond, currency and commodity price dislocations. Common sense would suggest the potential for rising interest rate pressure and commodity price inflation, but proper timing of trades will not be obvious. It will likely be an environment where market fundamentals will be in flux, and technically-oriented traders will have the upper hand.

GFM: What events do you expect to see in your sector in the year ahead?

TB: An increasingly interdependent world may periodically cause historical correlations among individual markets and market sectors to break down, and market fundamentals will be increasingly difficult to interpret. A portfolio of historically non-correlated assets may turn highly correlated virtually overnight, confounding even the most sophisticated risk management techniques. I expect the potential for continuing stress events to continue well into the future.

GFM: How will these developments affect your own portfolio?

TB: The lesson is to gauge aggregate portfolio risk in light of both accepted norms and historical anomalies. NuWave has engineered a proprietary risk overlay that sits on top of the aggregate portfolio, and individual trades derived from the firm's core trading logic are systematically accepted or rejected according to an analysis of rolling market sector correlations and a measurement of directional 'stretch'. This risk overlay is a key component of the firm's risk management strategy and f our overall investment methodology.

GFM: Are investors' expectations still moving toward capital preservation?

TB: While investors were moving toward capital preservation during the fourth quarter of 2008 and the first quarter of 2009, recent market activity leads me to believe that investors are tepidly looking to place assets once again. Investors are clearly interested in avoiding the liquidity trap that prevented exit from many hedge fund strategies in 2008 and early 2009, which has fostered an interest in liquid, transparent alternative strategies that are not correlated with traditional, long-biased investments.

As always, the key to intelligent asset allocation is diversification and non-correlation. NuWave's investment methodologies, like many managed futures strategies, have demonstrated an ability to deliver risk-adjusted returns over time that are non-correlated to traditional strategies and other hedge fund strategies.

In fact, managed futures is one of the few alternative investment strategies that tends to demonstrate negative correlation to traditional investments during stress periods for the equity markets, thereby offering true diversification when needed most.

GFM: What differentiates you from other managers in your sector?

TB: While many managers within the global macro/CTA space seek to identify directional opportunities across the financial and commodities markets, NuWave does so in a patently different way, resulting in a unique return profile.

Rather than pursuing a traditional trend-following approach, commonly based on momentum-based or break-out theorems, the firm instead employs a trend forecasting model largely based on pattern recognition theory. The result is often a marked difference in risk/return during certain inflection points in the markets, for instance in the timing of entry and exit signals, yet a proven historical ability to capitalise on directional price movements.

GFM: What is your experience of investor attitudes and the environment for fundraising in 2009?

TB: In the post-Madoff era, there is a desire for increased transparency as a growing number of investors request managed account structures, while those willing to invest via commingled investment vehicles seek enhanced liquidity, independent valuation, reduced counterparty risk and third-party oversight.

At NuWave, many of the firm's investment strategies are offered via managed accounts or commingled investment vehicles, providing the utmost in both transparency - including the ability to view positions on a daily basis - and liquidity, offering daily, weekly or monthly liquidity, with no gates or lock-ups.

Furthermore, all instruments traded by NuWave are listed on regulated exchanges, simplifying the complex valuation issues often associated with other alternative investment strategies, while well-capitalised clearing houses serve as counterparty to virtually all the firm's trading activities, minimising certain risks associated with individual counterparty exposures.

Lastly, the firm's activities are subject to independent audit and are regulated by a variety of government and industry self-regulatory agencies. In a nutshell, our style is liquid, transparent, and capable of making money when others cannot. These factors have fuelled significant inflows to our portfolios thus far during 2009, a trend we expect will continue.

GFM: What are your views with respect to the further consolidation of the industry?

TB: The past year witnessed an intense consolidation in the hedge fund industry, as many alternative investment strategies once thought to provide portfolio diversification proved highly correlated to the equity markets. Going forward, we expect further consolidation among funds of funds, while investment strategies that offer proven diversification and non-correlation over time will continue to garner assets, with a premium placed on liquidity, transparency and third-party oversight.