David, how long have you been in the Investment Management business and what attracted you to the industry?
I entered the industry in August 1999. My career has been entirely on the buy side of hedge funds and trading. One of the attractive aspects that brought me to this industry was the scalability of success - if you do a good job and produce positive returns for your investors you have the ability to grow a business to large scales. A second aspect was the constant flow of trading opportunities. Trading is a tough business, but essentially any day the markets are open there is an opportunity to profit from market opportunities and inefficiencies. The markets constantly evolve demanding rigorous R+D but many of the core skill sets to trading and research remain the same and it’s about finding the new opportunities and inefficiencies. A third aspect that attracts me to this work is the ability to easily measure performance and value to clients. This aspect on the one hand can create significant amounts of stress but on the other hand it is easy to know if one is doing a good job or not. Many people are turned off by the significant level of pressure and find it too much. However, when a trader does not need to worry about keeping others happy, but only on producing cash flow from trading, he can focus on what matters – producing profits which is an advantage I give our traders every day allowing them to excel in their field and which is satisfying in an un-measurable way.
When did Smart Box Capital commence operations and what services does the company provide?
Smart Box Capital was founded in 2008 and launched in 2009 with the aim of providing a platform for emerging traders (Traders with less than 100MM USD Assets Under Management) to source capital and for investors to have a tier 1 structure hosting the emerging talent they are looking for. With top class providers such as Credit Suisse (Custodian) Citibank and Newedge (Brokers) and an annual audit by KPMG, SBC provides investors with a secure environment to invest through as well as access to untapped emerging talent. Besides the funds currently on offer SBC also offers a managed accounts platform that gives smaller traders the ability to setup and generate their own track record which can later be rolled into a fund if need be or continue to run as a managed program. Though the number of traders constantly changes there are currently 8 trading teams under the managed program and 2 trading teams in the fund.
Today SBC has evolved into a breeding ground and capital source for emerging managers and offers a complete service from setup, through capital raising and complete administration and day to day operations with the aim of allowing traders to focus on generating alpha, which is a big enough challenge, without the hassle of setting up and running a full blown investment management operation.
Who are the key people involved in the firm and what are their main day to day responsibilities?
The firm was founded by Hadar Swersky who still runs it and is assisted by a team of investment and administration professionals who have made Smart Box Capital into such a success. The Chief Economist is Mike Astrachan, formerly the Chief Economist of Olympia and York, Senior Analyst at Merrill Lynch and Economist at the Federal Reserve Bank of New York, who has been accurately predicting world macro events for the past 35 years, predictions that have in turn generated billions of USD in profits.
His successful forecasts have been published by Merrill Lynch, Dow Jones, Reuters, Barron’s and other leading publications around the world. Manager selection and risk is run by myself. I specialise in emerging managers, especially in the quantitative space, with a focus on low volatility strategies that are scalable. The core managers I like to work with have 5-10 years’ experience working for other firms in a trading or senior research capacity, have gained valuable experience, learnt from mistakes and are now ready for the spotlight of managing institutional capital with its demanding requirements.
Can you tell us a little about your Smart Box Capital’s Managed Accounts platform and what are its primary objectives?
The Managed Accounts platform was founded in 2011 in order to provide investors with a diverse portfolio of strategy types managed by traders with institutional trading backgrounds coupled with tier 1 infrastructure and risk management usually only offered in a pooled vehicle structure. Our portfolio of strategies are developed and managed by managers with strong academic backgrounds in mathematics and computer science. These traders after school and / or serving in Israeli military elite intelligence units and have then gone on to work for global investment firms in NYC, London, Paris and upon return to Israel wanted to continue working in trading and alternative asset management but could not find appropriate institutional level opportunities. Our goal is to harness this talent pool into producing low volatility strategies that cater to the needs of institutional investors while providing the highest level of efficiency and transparency. The end result is a pool of independent strategies managed by “off the radar” talented managers within a transparent, liquid managed account setting.
What are the advantages of emerging managers and how does it benefit investors?
Investing with emerging managers has pros and cons. Smart Box Capital works with its managers to accentuate the pros and mitigate the cons to produce more value for our investors. Some of the advantages are certain market inefficiencies which have a small profit capacity due to lack of liquidity in their specific marketplace. In these cases the larger funds will often not take advantage of the profit opportunity as it does not produce enough overall revenues to satisfy the needs of a multi-billion dollar fund. Meanwhile the smaller, nimbler manager with only $10-100m in AUM will aim to take advantage of these smaller opportunities as it can be a meaningful profit source to its smaller investor base.
Emerging managers can further provide more access and transparency to investors.
They are, for example, often willing to work harder per client and satisfy their requests for information and even provide bespoke strategies. Many large and well established managers will provide only minimal transparency and risky redemption terms. Negative aspects of an emerging manager are tighter budgets to create a solid infrastructure and the need for the manager to focus on the business (capital raising, office management, legal / compliance) which can drain the manager’s time from the core business of research and trading. This is one of “the” aspects that Smart Box tackles to minimize the workload on the manager’s end, except of course core R+D and trading, to a minimum. Ideally we like to provide an easy environment for managers to come work on research and trading without any other burdens other than good risk management.
What do you consider to be the key strengths, expertise and operational advantages of Smart Box Capital?
When you look at SBC’s offering the strengths and advantages differ for traders and for investors. While capital raising is important most successful traders have a couple of “friendly” investors that are prepared to back them which is normally enough to setup and start generating a track record however we find that traders that have worked for a small fund or prop shop have no knowledge with regards to the setup and operations which can be both tricky and costly especially as they start to navigate the professional web of lawyers, accountants and administrators not to mention brokerage accounts, credit risk calls and a host of other issues. SBC provides a “turn key” solution right up to the fund’s ISIN number and funded trading account leaving the traders free to focus on making money for their investors. For investors, SBC provides a transparent and liquid structure with the highest level of third party supervision which has become a prerequisite post Madoff. An additional bonus for investors is the introduction to pre-vetted traders that would not be “discovered” or “investable” without the help of SBC.
What instruments do you trade and what characteristics are you looking for in an asset class?
We trade only liquid assets classes as that allows for effective risk management. Furthermore, in a post 2008 credit crisis where many alternatives financial products were not properly valuated within mark-to-market accounting it was hard for investors to know with 100% accuracy what their account valuations were or get their money back even when willing to accept major losses. Therefore, in order to remain fully transparent and liquid for our investors we stick to liquid asset classes only: long / short US equity, futures and spot FX and so on. This means we miss out on certain asset classes that can produce outsized returns (for example distressed debt) but we prefer to provide our investors with the safety of near cash level liquidity. This also produces an easier risk management environment for our risk management team as all our trades have a clearly defined set of risk / return parameters and pricing/valuation.
What style of trading do you undertake to execute your strategies and do you have any particular preference for specific trading time horizons, such as short, medium or long term?
Our main focus is on low volatility strategies that are liquid. Theoretically we should be agnostic to strategy types but we tend to prefer un-leveraged FX and market neutral US equity and if not market neutral then low directional exposure as measured by cash or beta. Many of our strategies use computer science and statistical testing to enhance their research and in some cases the trading execution is automatic. We do not take a view where we only invest in 100% auto-execution or only 100% discretionary managers – rather we view computers as a tool traders use at their discretion to enhance R+D and execution. Many of our strategies are 80% or more auto execution with manager override and discretion when needed to lower risk. While others utilize computer science to create screening tools for trading ideas.
Regarding time horizons, we tend to prefer shorter-term strategies; some as short as intra-day and the longest strategy holding positions for 3-4 months. The preference of shorter term, especially with early stage managers, is that it produces a larger amount of measureable data points (trades) within a shorter time frame which gives us the framework to do rigorous analysis on our performance assumptions. All managers and strategies have ups and downs and we aim to dynamically assess the performance and monitor whether we are on track or not. The longer the holding period of a strategy the more time it takes to measure the significance of the performance and the alpha produced by the manager. Many longer term strategies can take 9-12 months before enough data has been amassed in order to make a concrete decision about the strategy and its performance – which is a risk we try to avoid.
How do you go about back-testing your proprietary trading systems and signals to confirm that your strategies will perform as required and will remain relevant to the long term trading goals and performance criteria of the firm?
Back testing is a tool to be used carefully, as “curve fitting” can create a false sense of security. We first prefer strategies with logical trading rules based on sound financial and trading principles while statistical testing is only used to confirm or deny the strategy’s underlying logic. Generally, strategies look at multiple data sets: fundamental, economical and technical analysis.
Much of our work is in the Behavioral Finance space, where we try and analyze how other intelligent investors with unique information are reacting to the market and where we might have an edge in measuring their trading behavior. When we back-test we use in-sample data sets and then test our results against out-of-sample data sets and on other asset classes.
What Money and Risk Management models have you developed and how do you apply them with respect to different portfolios, strategies and individual client needs?
Risk management is the core of our entire operations; we focus on a few key aspects:
• Low position concentration, for many of our strategies its lower than 3% of capital per position
• Low directional exposure, usually +/- 10% per strategy
• Liquid asset classes only – real valuations at all times and available liquidation if needed
• Diversification of uncorrelated strategy types, each looking to extract a different inefficiency from the market
To what extent have you developed research agendas and analytical programs to help improve the design of new investment strategies and the ongoing enhancement of your existing investment processes?
Our research agenda is dictated by demand from the market place which in our case represents mainly institutional investors. Since our risk / reward profile is in the low directional low volatility scope of investing, we focus our R+D on those types of strategies. We stick to liquid only strategies but are willing to entertain any strategy type that has a logical financial concept and sound trading rules. In the past we have even invested in strategies that we know will have a defined life span, for example leveraged ETF arbitrage when we believed the time was right for such a product/theme. These ETFs were rebalanced daily by the market makers and that rebalancing process was inefficient, especially in higher volatility markets. As long as the volatility in the market was above average and the brokers allowed for leveraged trading in these products then a low risk profit opportunity existed. We were willing to invest in this, even though we knew we only had a short window of profitability (in this case it was 3 years) as the strategy further enhanced our diversification.
What sort of electronic trading platforms does Smart Box Capital find most appropriate to use and what factors influenced that choice?
Having a variety of traders means SBC uses a wide variety of the available trading systems and platforms out here. From PATS and Trading Technologies for futures, through Currenex, Bloomberg, DB Autobhan and EBS for currencies and a host of other platforms for equities and other non-traditional products.
How did you go about building your trading desk IT infrastructure? For example, did you make use of third party algorithm, software, IT and connectivity specialists etc.?
All of the SBC traders are connected directly to the broker with whom they work and have setup their own connectivity to maximize their trading strategy. Each connection is approved and monitored by SBC’s risk team through traders are encouraged to work directly with the brokers to avoid delays and misunderstanding.
What new strategies and products has Smart Box Capital been exploring as part of your continuing efforts to innovate, differentiate yourselves from competitors and broaden investment opportunities for clients?
In view of our tight risk management rules and desire to produce low volatility returns for our investors, we are expanding further in the short term in futures & FX trading. Some of the work is event driven, news based strategies, while others are purely quantitative and require auto-execution. We avoid high frequency trading where the R+D can be costly and the “shelf life” of a strategy can be very short due to the evolution of the markets and its micro-structure which high frequency trading tends to look to exploit. We like strategies that have a simple logic and reasonable long term profit expectation. Another area of expansion is in long / short US equity strategies that have found unique inefficiencies. Within the L/S US equity space we are also looking to deploy small parts of our R+D budget towards strategies with a higher return profile but usually that means it also comes with more risk. We do this as a result of feedback from existing and potential investors of what’s needed for their investment portfolio.
Smart Box Capital also operates a Multi Manager Program. Who is this aimed at and what services does it provide?
The multi-manager program is geared for institutional investors or family offices who want access to a customized portfolio of strategies within a managed account structure with its above mentioned benefits. The institutional investor can choose a basket of independent strategies that best meet their risk / reward profile. We allow our investors to choose which of our sub-strategies best meet their needs and allocate their capital selectively to the most suitable strategies. An additional benefit that is inherent in a managed account structure is the possibility to deploy to single strategies at a level which is below the broker’s required minimum, which can often be $5m+, meaning access is granted to smaller investors rather than being limited to very wealthy and institutional investors. Our investors here are mainly small-medium size institutions and family offices that are focused on tight risk management and require liquid investments yet many times do not meet the minimal allocation requirements per singe managers in other formats.
What are the constituents of your Multi Manager Program’s Eco System and what benefits does it offer for managers?
Making consistent returns is hard enough for any trader and our structure allows first and foremost for traders to “discard” all aspects that are not related to the actual R&D and trading and know that they are taken care of with the highest level of transparency and professionalism. Our managers usually have a mathematical or computer science education, have then worked for 5-10 years in global firms and have then decided to launch their own strategy and want research independence and peace of mind with regards to all operational aspects. Under the SBC umbrella they enjoy the ability to focus on R+D and all business, marketing and operational aspects are handled by us. SBCs operational team handles all day to day aspects that are not related to the actual trading and managers are given access to Tier 1 providers which would not accept small managers under their regular conditions but do so under Smart Box Capital’s umbrella. The traders often manage one large account and the brokers and software split the trades between the various Single Managed Accounts allowing the trader to focus what they are best at: R+D and generating alpha.
Looking ahead, what are your plans for growing the business and making Smart Box Capital investment expertise available to a wider and more diverse mix of investors?
Smart Box Capital is now expanding its operations to work with multiple executing and prime brokers, making it easier for institutional investors who prefer to keep their capital within their prime broker structure and to invest with us. Technological and software advances have made managing multiple brokerage accounts much easier including pari-pasu trading and back office management that have semi-automated processes. We are focusing our distribution efforts through partnerships with prime brokers who have their existing clientele and want to improve their offerings to these investors, especially investors who prefer cash-like liquidity and require low volatility returns.