n QIM set to join the billion dollar CTA club p14 n March hedge fund performance p26

hFMWeek

19-25/4/2007

ISSUE 70

HedgeFundManager

How to
profit
from
climate
change
Its green as in greenback p16

IN THIS ISSUE: n 3 ThE HFM week n 4 News n 10 LAUNCHES AND SEARCHES n 12 ANALYSIS: Rise of bank-owned administrators
n 13 PEOPLE n 20 PERFORMANCE n 41 SERVICES DIRECTORY n 45 REVIEWS n 46 COMMENT: Why its good to talk to the media

commodities
QIMs model has produced startling long-term, non-correlated returns. Unsurprisingly,
investors are buying, pushing the CTA towards the billion-plus club. By M Corey Goldman

Hot models rev up returns

M

anaged futures traders

arguably have a tough lot.
Once among the primary
drivers of the alternative investment
scene, most commodity trading advisors (CTAs) today play second fiddle
to their larger and more aggressive
hedge fund cousins, with trend-following black-box strategies that
make it difficult to break away from
the pack and produce out-of-the-ballpark returns.

That is, unless theyve managed to defy

the odds by coming up with a quantitative program or model that can produce
consistent, long-term non-correlated
returns and by extension join the billion-dollar club that the likes of Winton
Capital, Chesapeake, AHL, John W
Henry and other well-known managed
futures elite already inhabit.
Indeed, save for a few dozen wellknown traders, many of whom emerged
from under the wings of famed Chicago
trader Richard Dennis in the 1980s,
CTAs have generally been forced into
the shadows of larger and more popular
hedge funds and funds of hedge funds
despite the commodities boom that has
gripped the world for the past two years.
There are exceptions, though. One is
Quantitative Investment Management,
(QIM), nestled in the leafy college enclave
of Charlottesville, Virginia. There, far

Most CTAs
have been forced
into the shadows
of larger hedge
funds despite the
commodities boom
that has gripped
the world for the
past two years
14 | 19-25 April 2007

NOT BY THE BOOK: Woodriffs strategy is uncorrelated to trends or other trading programmes
from Wall Street and Chicagos famous
Loop. QIM co-founders Jaffray Woodriff
and Michael Geismar are quietly maintaining their numerous futures models
and producing strong, consistent returns
and steadily inching their way toward
the $1bn in assets mark as a growing
number of investors take notice.
Its our lack of correlation that has
helped us raise assets, says Woodriff,
38. Investors seem to like the fact that
were not necessarily a brand-name
CTA, but that we perform consistently
and well.

Seeking a distinctive edge

Woodriff first got into managed futures

in 1987 while studying at the University
of Virginia, where most of his current
13-strong staff graduated. Not impressed
with mainstream managed futures
research and trading methodologies, he
came up with the idea of finding predictive patterns in various markets that had
a distinctive edge.
I knew I wanted to find something
that was not in books and that was
distinct and different from what other
people had talked about doing, he says.
I felt getting as far away as possible

from what other people were focusing on

would serve me well.
Not at first. Fresh out of college, in 1991
Woodriff started a small CTA firm Blue
Ridge Trading that employed his collegetested trading methodologies. Returns
were good 23.4% over nearly three years
but with assets peaking at just $3m and a
falling out with his then-partner, he opted
to shutter the firm in July 1994.
He then founded Woodriff Trading
as a CTA, managing client money. But
again assets only rose so far, and wide
parameters on volatility made for wild
gyrations in returns. In January 1998, he
joined Socit Gnrale in its New York
office, where he served for two years on
the prop desk, trading funds in futures,
currencies and US equities.
In December 2001, Woodriff and
Geismar regrouped and began managing a proprietary futures account using
Woodriffs methodology. In October
2003 they opened it to outside clients.
It has certainly evolved, but the core
methodology I came up with back in 91 is
essentially the same methodology we use
today, says Woodriff. It is a strategy that
is not correlated to trend-followers or any
trading program that I am aware of.
www.hfmweek.com

On days when a lot of hedge funds are getting

creamed, Qim is typically doing very well
Rishi Narang, founder, Telesis Capital
QIMs global model is a low-volatility
managed futures program that has a nearzero correlation to stocks, bonds and hedge
funds. Annualised volatility is targeted at
12% and all positions are in highly liquid
futures contracts that are held anywhere
between one to 50 days, with an average
trade length of seven days.
But like most scientific, quantitative
strategies, explaining how the program
actually works isnt simple.
Woodriff describes his methodology as
quantitative behavioural finance, or the
collective behaviour of a large number of
market participants. In other words, it
identifies behavioural patterns among
large clusters of market participants
and uses science and software to figure
out ways to make money by exploiting
the knowledge.
Each day after the markets are closed
the team updates all the price data with
open, high, low and close values. They then
run the models in the evening over 1000
of them which generate signals that are
used to determine whether they should be
long, short or neutral, as well as what size
position they potentially want to take, on
the following days market opening.
We have ideal positions generated for
each market, and then we can compare
our ideal positions to actual so we can
get as close to ideal as possible, says
Geismar. The program currently trades
in 27 different markets across five sectors, ranging from the Hang Seng index
to Euribor interest rate contracts to the
Mexican peso to crude oil.

Leader of the pack

Woodriff sites copper as one of the best

examples of how his strategy and risk
management have proven themselves.
Last April the firms models all pointed to a drop in the price of copper,
prompting the firm to go short. Copper
did the exact opposite, rising to an alltime high.
We were dead wrong in that position for an entire month, and we lost
3% in that position, recalls Woodriff.
Obviously it could have been much
worse, but the way our model works
we were taking off contracts throughout the month. We were actually scaling
back our positions because of the rapidly
increasing market volatility.
That and diversification are what
make QIM stand out from the pack, says
www.hfmweek.com

Woodriff. We have maximum exposure in each market and sector, so were

always trying to stay diversified. Its not
possible for us to get hit really hard in
one market.

Every car needs a driver

Of course all cars no matter how

sophisticated need a driver. While
there is almost no manual discretion in
Woodriffs program, he and his team do
periodically adjust the set of markets
they are invested in as well as the time
frame of their positions. Once a year or
so they add more models and change the
weightings based on their research.
All of that and the programs
consistently decent returns have
prompted a recent flood of cash. At the
end of 2002 QIM had $1.7m in assets
under management. That more than
quadrupled to $8.8m by 2003, jumped
to $13.8m in 2004 and then surged to
$145.6m in 2005.
By the end of 2006 QIMs global
program had $527.8m in assets. Yearto-date through April the program had
more than $872m. Some 70% of QIMs
investors are funds of hedge funds; 80%
of their money comes from Europe. The
balance of their investors includes high
net-worth individuals, pensions, family offices, proprietary money and even
other CTAs.
On days when a lot of hedge funds are
getting creamed, theyre typically doing
very well, says Rishi Narang, founder
of Los Angeles-area fund of hedge funds
Telesis Capital, who seeded QIMs fund
in June 2005. You really get what you
see with them.
To be sure, both Woodriff and Geismar
admit the meteoric rise in assets has
prompted some eyebrow-raising from
both their existing and potential inves-

tors not about where the money is

coming from but about whether their
strategy can hold its own and continue
to produce.
Frankly, if theres a source of concern
for investors, thats it that theyve got
too big too fast, agrees Narang, whose
$425m firm invests mainly with quant
managers. But if you look at the fact
that they put up a nearly 23% gross
return last month [in their 3x leveraged
vehicle], that tells you they may not be
too big theyre doing the same thing
theyve been doing for a long time.
Indeed, beyond last years anomaly of
a mediocre 5.3% return, the program has
performed extremely well. It returned
13.6% in 2002, 32.7% in 2003, 23.8%
in 2004 and nearly 20% in 2005. Yearto-date through March the program was
up almost 9% net versus a 1.5% drop for
the Barclay Group CTA Index over the
same period.
It is those kinds of returns and
that kind of faith from their investors
that will propel the firm beyond the
billion-dollar mark, both Woodriff and
Geismar say.
We are definitely not another long-term
trend-follower in the CTA space, which is
why we are attracting a lot of attention,
says Geismar. It certainly didnt happen
overnight it took us a long time to reach
the $10-million mark but I think were
now at a point where our experience and
longevity as a firm and our track record is
attracting investors.
Certainly after our returns last year,
some of our investors were wondering if
we had grown too large too fast, agrees
Woodriff. But overall the program performs well in periods when most other CTAs have difficulties. That is what
investors like about us. That is why I
think we can easily be a $2bn CTA. n

QIM MONTHLY RETURNS

April 05 - March 07 (%)

+7.5
+5
+2.5
0
-2.5
-5

Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar
05 05 05 05 05 05 05 05 05 06 06 06 06 06 06 06 06 06 06 06 06 07 07 07

19-25 April 2007 |

15