Roy, your career to date has involved holding responsible positions within investment management and investment banking, particularly on the trading side. In what ways do you think your background has equipped you with some of the key skill-sets needed to succeed in the very competitive and disciplined business you are currently in?
Much of what we have learnt as a team is from our combined experience of having been through all of the major market upheavals over the past 35 + years, and reading and studying about those which happened before that. Managing risk is the key to longevity in financial markets. Ensuring that at the outset of any trade, or investment we cap our downside, and remain exposed to liquid trading instruments allowing us to completely exit if we feel it appropriate is most probably the most important lesson we have learned. This has allowed us to ride through some very rough periods in the market and remain competitive as an organisation.
Why was the decision taken to launch ISAM back in 2008?
There was a unique opportunity that was presented to us because of Lord Fink’s departure from Man Group. At the time Man was the largest hedge fund in the world. The business spanned systematic trading, third party allocations and had recently floated its brokerage business. We came together with the aim to slowly over time try and replicate some of what Stanley had so successfully achieved at The Man Group, namely to build a world class, institutional grade hedge fund business in the first instance and then take other opportunities as they present themselves.
What range of activities is ISAM engaged in and can you give us an idea of the scale of the business?
ISAM is a systematic hedge fund business managing two systematic hedge funds and one third party allocation fund alongside IS Prime. We have about 35 employees across five offices London, New York, Dubai, Sydney and The Cayman Islands.
Most of those employees are dedicated to the development of the funds in particular ISAM Systematic and ISAM Quantitative Strategies. We have a significant quantitative research team which is tasked with the continuous development of the strategies within those funds, focused on aspects such as new streams of Alpha, reducing execution costs, developing new methods of trading and accessing a broader set of markets.
We have made a considerable ongoing investment into technology and development which serves to help us implement improvements quickly and efficiently as they are approved. Our technology and trading department is the largest team at ISAM and that reflects the emphasis that we place on those skills to deliver an efficient and secure trading environment.
Who are the key people running ISAM and what are their day to day responsibilities?
Stanley Fink is the CEO of ISAM and as such is ultimately responsible for the overall direction and strategy of the firm. There are two Managing Directors myself and Alex Lowe and together with Stanley we form the Executive Committee which meets informally twice a week and more formally once a month. Alex and I are responsible for the day to day running of the company; he has extensive experience of the client facing side of the business and I have more experience on the trading side and therefore I also am responsible for ISAM Fusion. Together we both have a lot of experience in building and maintaining efficient corporate and operating structures and we have found our skill sets very complimentary.
Jon Rowland is our Head of Trading and Technology; he is responsible for the trading of the funds, the implementation of any changes to the trading system and the ongoing maintenance of the technology infrastructure at ISAM.
Darren Upton is the CIO of the Systematic and Quantitative Funds and is responsible for the performance of those two products, chairing the investment committees and setting the research and development agenda.
Raj Sitlani and Jonathan Brewer are the managing partners of our new brokerage business IS Prime.
What sort of clients is ISAM mainly providing services for?
On the Asset management side our clients have tended to be institutions, based in the US, Europe, the Middle East and Australia. We have a number of Fund of Hedge Fund clients as well as family offices.
IS Prime will target retail brokers, asset managers, regional banks, hedge funds and family offices.
ISAM is primarily a CTA which runs about $700m in futures and OTC FX markets. Please tell us a little about the core products of the firm.
Our flagship fund is ISAM Systematic which is a pure trend following system tracing its roots back to 1981. It trades over 130 global financial and commodity futures markets, capturing profits from market divergence, utilizing adaptive trend-seeking methods on a medium-term time-frame, with a shorter-term focus on risk management.
We have made significant strides in our research and development in this product and at the time of writing ISAM Systematic is one of the top performing funds in the world this year, up 45%. (See chart below)
We have also developed a new fund called ISAM Quantitative Strategies which is a systematic multi-strategy trading portfolio. It therefore has a wider remit than ISAM Systematic with a lower volatility. It trades over 100 global financial and commodity futures markets and over 2000 single name equities, with trading horizons ranging from intraday to multiple months. It began live trading in February this year and is up 20% year to date.
ISAM Fusion is a third party allocation fund. Currently we have allocated around $260 million to over 30 Forex and Short Term CTA managers (we do not include this in the client fund number of $700 million mentioned above). As a team we have been running this product successfully for over 10 years.
What approximate percentage of your overall investment activities is attributable to ISAM Fusion and why does this portfolio focus on allocating to Foreign Exchange managers rather than other asset classes?
Around 30%, we prefer Forex due to the superior cross margining and risk management benefits. Having the managers execute their trades through our platform allows us to real time monitor our risk and our margin.
What approach do you employ to actively manage your Forex strategies particularly in terms of re-adjustment and risk management?
Each manager has a predetermined stop loss. Ensuring we keep to this and watch correlation across managers are the primary tools we use to manage our risk.
Why have you decided to establish a new business called IS Prime and what services will it be offering?
We initially wanted to build a trading and execution offering for our own asset management business seeking to aggregate multiple price streams to make our own trading as cost efficient as possible. We had a number of external managers to whom we allocated through Fusion that we thought could also benefit from this. We learnt quickly that there were further significant synergies that could be harnessed particularly around technology and risk management. We were fortunate to come across Raj Sitlani and Jonny Brewer early in our thought process. They clearly had a great deal of experience in building and managing an eFX business combined with a very good reputation throughout the client base. We quickly developed a common understanding of what those synergies were and crucially a realisation that both parties had a significant amount to contribute to the whole.
Let’s talk a little bit about technology. How important is software and electronic trading systems to your business and the way that it operates?
Technology is critical to the development and competitive edge of ISAM. Ultimately it is about efficiency, whether you are talking about research, trading algorithms, execution, security, communication, presentation, in fact about anything that you do in a modern finance company. This is one of the areas in which we feel we will be highly competitive in IS Prime. We have built out a state of the art platform from execution through to middle and back-office which will enable us to deliver a scalable, fast and secure customer-friendly trading system. This is the absolute corner stone of our offering; we recognise our client’s requirements for a robust yet flexible offering and feel we will deliver that.
Do you prefer to build and maintain your own trading, connectivity and IT infrastructures or is this outsourced to third party vendors?
Given the importance we place on technology we do have an inherent cultural preference for building our own systems. We have a team of highly skilled developers with significant experience in building robust trading solutions. Despite this preference, we recognise that there are areas of any infrastructure where external partners can help either to reduce costs or to bring value with pre-packaged and already proven solutions. In these cases we choose to partner with technologically advanced vendors who have open platforms which allow us to integrate seamlessly with our own infrastructure.
Lack of volatility and other factors have made the currency markets a difficult place for many investors over the past year or so. Are you optimistic that change is in the air and that we are likely to see less correlated markets that should provide a more profitable FX trading environment?
Yes. Our process of continuously looking for new profitable managers and parting company with those who no longer make returns means that we stay very up to date with changes in markets and strategies. We have noticed a significant fall in correlations already which has benefitted ISAM Systematic this year. The chart above shows the fund’s correlation numbers with various market betas and demonstrates its ability to deliver strong returns with low correlation to other asset classes. We are starting to see that come through in the returns of ISAM Fusion.
Given tough market conditions it’s not surprising that the number of investment managers with dedicated currency products has declined. Do you think this presents opportunities for ISAM and do you agree with the argument that fewer players mean more rewards when markets return to more normal global investment flows?
Yes. Our key aim has always been to develop the business in a way that ensures that we can not only survive difficult times but benefit from them. Market participants have a habit of allocating aggressively at the top of a cycle and de allocating at the bottom. The recent movements in allocations to both CTA and Forex managers have been yet another example of this, but we have adapted accordingly and we feel that we are well placed to take advantage as strategies recover.
In what ways have new regulatory and clearing requirements across the capital markets impacted on your own trading and investment activities and do you see them as a threat or opportunity?
This had not had much of an impact on us, as asset managers. Obviously with the arrival of AIFMD and to a lesser extent Dodd Frank we have had to submit applications and reporting, but broadly it has been in line with the sort of reporting we have in place already. We have offices in London, New York, Dubai, Sydney and the Cayman Islands and have been able to keep abreast of all changes and operate successfully though them.
Do you think the traditional factors that influenced how investors went about choosing an alternative investment manager have changed since the financial crisis and if so, what do you consider to be the most important criteria nowadays that they need to consider before making their choices?
I am not sure that it was so much the Financial crisis itself as opposed to the specific hedge fund frauds typified by Madoff that caused a change but certainly they changed significantly, both in terms of the depth of information and the breadth of subjects covered. In particular operational due diligence became a much larger area of focus than was previously the case. This was probably no bad thing although the knock on effect was to make large and outwardly more stable funds more attractive than smaller earlier stage managers. A firm such as ours needs to be able to demonstrate significant stability and strength, in terms of its balance sheet, operating structure, corporate governance structure, compliance regime and general business management in a way that was not the case previously. Of course that significantly increases the barriers to entry and to an extent explains why we have seen larger managers grow and smaller managers struggle to break through.
ISAM clearly has huge strength in the combined market experience of its senior management. What other attributes do you think gives the firm an edge and differentiates you from many other managers?
With experience it is really about how you use it. I think that we have built a very cohesive and efficient team that is able to lever off each of our combined experiences to the benefit of the firm and its clients. In particular it has allowed us to be highly adaptive in what has been a period of significant change.
Our main fund is a trend following CTA and trend following as a strategy has been difficult for a number of years. We recognised that and committed a significant piece of work to substantially enhancing that strategy with the result that this year we are I believe the top performing trend follower in the world.
At the same time we have developed a systematic multi strategy fund which is also one of the top performers in this its first year of trading and we have also launched a new brokerage business.
The ability to adapt and move rapidly is a function of the early building blocks we put in place, hiring the right people, building state of the art technology and sound business management and decision making structure are what has allowed us to do that. You could say that is as a result of the combined experience but the trust and effectiveness of the team is I think something that is developed by something more.
What plans do you have for expanding the range of products that ISAM currently offers and perhaps extending your services to wider client sectors and increasing your global footprint?
We have developed a great deal in the past twelve to eighteen months, whether in our flagship fund, our new fund or our new business IS Prime, so the priority for now is to grow those businesses properly with the correct support and infrastructure rather than develop new ones. So in the immediate future we will look to raise assets globally for the two systematic hedge funds and continue to develop their trading strategies.
For IS Prime we will officially go live in the new year, and then the focus will be to develop the client base, again globally, and the product base to satisfy that.
Looking ahead, where do you see the main challenges and opportunities for ISAM as you seek to deliver prosperity and investment returns for your clients?
To a great extent the challenges are the opportunities, in that if we meet the challenges and deal with them then we will take the opportunities that they present.
So if I think about the asset management business the challenge is to continue to deliver strong performance to investors. I do not expect that we will deliver 45% in a year very often, but we need to show investors that this is not a flash in the pan, but the result of significant research and development. So the challenge is to build on this year and to push further ahead with our development pipeline, we have a number of further adaptations which we are looking to deploy in the New Year.
These developments have been challenging to research and will be challenging to implement, but we believe they will further increase our opportunity set in both ISAM Systematic and ISAM Quantitative Strategies.
Within IS Prime the challenge has been to build the infrastructure, which we have largely completed, and so it now shifts to deploying that infrastructure to our various partners and potential clients. This state of the art technology spans a number of different areas of the business such as client and LP analytics which is a key set of metrics that we feel are often overlooked, the modules that will support our outsourced market making functions, as well as the entire suite of T+0 reporting tools.
We believe that a key area of differentiation in a competitive landscape is technology and therefore we felt it was never going to be good enough to simply re-sell someone else’s technology if we want this business to grow as it should. At IS Prime we have a very high calibre technology team which enables us to offer a combination of proprietary and market leading third party systems. I know that this capability was one of the key reasons that Raj and Jonny joined us.
The main challenge that we now have is distribution. We do not have a simple one size fits all solution, as we favour offering a truly bespoke service to each client. While this flexibility is clearly a major advantage of our offering, it will present technical and organisational challenges, but we are confident in the ability of our people and our systems to deliver this flexible approach and that is our edge and our opportunity.