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Back-testing A Systematic Fund of Managed Accounts

By: Peter Urbani*

* Peter Urbani was most recently Chief Investment Officer for Infiniti Capital a Fund of Hedge Funds group. He is a 20 year investment industry veteran and has served variously as Head of Portfolio Management, Head of Research both Quantitative and Qualitative, Head of Investment Strategy and as a buy-side Mining Research Analyst. NOTE: The Lyxor Fund universe used within this presentation is used for illustrative purposes only. We have no affiliation of any sort with Lyxor and this is not a solicitation or recommendation to buy or sell any of their products.

Lessons from the Credit Crisis

Funds of Funds business model under pressure Scale AUM > $5bn or Niche e.g. Asian focus, Emerging Managers Fees under pressure Historic Fees 2:20 - the new normal 1:10 1:15 Demand for greater TRANSPARENCY Demand for greater LIQUIDITY Historic Liquidity 90 120 Days now 30 Days wanted New Fund Vehicles UCITS III, Managed Accounts, Act40 ETFs

One Possible Solution A Fund of Managed Accounts

Meets the demands for Liquidity Mostly weekly Improved Transparency Daily pricing and aggregated exposures More frequent pricing allows for systematic method backtesting Reasonable Returns achievable but estimated Liquidity Risk premium of approx 2.00% paid by consumer in the form of lower returns Range of offerings is improving but still small relative to the Hedge Fund Universe. Multiple platform providers

A Systematic Fund of Managed Accounts utilising the IAS SFA scoring methodology

Proprietary Software

Import Fund Selection Universe

Data Import Wizard

Imported Database Of Fund Returns

Portfolio Optimisation Setup and Constraints

Objective Function To Use + = Maximise - = Minimise

Simulated Annealing Optimisation Algorithm

Iterative process that initially allows for worse solutions to be accepted to ensure that the feasable search / solution space is fully covered. Can accommodate highly non-linear objective functions and multiple constraints

Single Period ( in-sample) optimisation

Next Period ex post ( out-of-sample) return

Advanced Settings Multiple Run Walk Forward Optimisation

Walk Forward Optimisation

Next Period ex post ( out-of-sample) return


Out-of-sample next period returns


Walk Forward out of sample returns

Selection Based on Custom SFA Score Ranking of Risk Return Persistence

SFA Score Constituents And Standardisation

Trust but Verify

Always provide sufficient information for clients to independently verify results

Lower Downside Beta

Higher Upside Beta

Non-Linear Bivariate Dependence

Higher Average Returns

Lower Drawdowns

Less Downside Risk

Higher Upside Potential

Fund Factsheet with SFA Score

Best-Fit Distributions Goodness of Fit

Scores for Risk

Scores for Return

And Persistence

4-Moment Risk Decomposition

4-Moment Risk Decomposition allows for more meaningful disclosure. Includes Modified StdDev and CVaR, Liquidity VaR and Drawdown at Risk (DaR)

Four Moment Density Forecast

Current Weights Versus Equal Weighted

Note significant reduction in CTA weighting from benchmark and previous period


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