qCIO: Risk Factors
A unified, all-encompassing approach to Global Macro investing




Describe your Investment Strategy in Terms of Risks: 

LEVERAGE
  • Discuss your leverage exposure policy and its management over different market cycles: The strategy is invested in futures contracts. The team applies a conservative definition of leverage (sum of the absolute value of notional exposure on the long and short side) to the portfolio. Leverage is determined by the tracking error objective of the fund and the equity. Because we track the overall tracking error of the strategy, leverage is also closely monitored. It tends to fluctuate only moderately through time. As an example, the leverage for the seed money account managed with a 5% target tracking error varied in a narrow range since inception (2.6 to 3.2 times).
  • What are your portfolio financing constraints/limits?: The use of futures contracts is capital efficient as only a small collateral is required to cover initial and variation margins. However, it entails a drawdown risk as potential losses can be magnified due to leverage. qCIO® Global Macro and GTAA Strategies will be calibrated so as to never exceed each investor's limit leverage.
  • Discuss sensitivity (cost) to LIBOR levels: The strategy is designed to generate excess returns above the benchmark (Libor USD 1 month) and is not sensitive to Libor levels. The net daily returns since inception have had a very low correlation with Libor returns (i.e. 3.5 points of correlation).

HEDGING
  • How is the portfolio hedged?: The long/short qCIO® Global Macro and GTAA Strategies derive their implied optimal hedge ratio via advanced optimization techniques utilizing dynamic expected returns and risk of all assets in the investment universe (i.e. equity, fixed income and FX). 
  • How do you determine size and limits for each position/basket?:  Positions are determined by portfolio optimisation with constraints. There is no hedging per se of foreign exchange as the strategy is structured as a global macro, not an overlay. Currencies are treated as a separate asset class providing both alpha and diversification benefits. The optimal portfolio weights on foreign exchange are derived via  advanced optimization techniques utilizing dynamic expected returns and risk of all assets in the investment universe (i.e. equity, fixed income and FX).
  • How do you determine size and limits for each position/basket?: The strategy is designed to generate excess returns above the benchmark (Libor USD 1 month) and is not sensitive to Libor levels. The net daily returns since inception have had a very low correlation with Libor returns (i.e. 3.5 points of correlation).
  • How often do you re-hedge?: Most of the rebalancing takes place at the beginning of the month whilst intra-month adjustments are possible.
  • Are short positions profit centres?: So far, the aggregate short positions have contributed positively to the returns of the strategy.
 
LIQUIDITY
  • Discuss the nature of illiquid holdings in the fundThe team does not invest in illiquid investments as the strategy invests in liquid futures contracts. The only market with a lower liquidity is the Swiss fixed income futures market. Although this market is included in our universe of views, the strategy does not invest in that market.
  • What is the liquidity of the underlying assets and what is the appropriate time period to liquidate?: The strategy only invests in liquid markets. Mark to market is carried out daily and based on the settlement price for the day. Trades are executed at the opening of markets on the day following the order.

DIVERSIFICATION
  • Discuss the depth of diversification: Diversification across signals is considered a key feature in the  qCIO® Global Macro and GTAA Strategies. To identify return opportunities, we analyze markets by focusing on a parsimonious and well-diversified set of signals. These are grouped into five broad “investment themes”. These factors are consistent with economic intuition and were retained on the basis of their predictive power.
  • How do you calculate the correlation between each investment in the portfolio?: We compute correlations by considering exponentially weighted daily returns (on a 52-week moving window basis, assuming a half-life of 2.5 years). We use the same methodology for computing the variance of the assets.
  • How has performance been distributed across positions and time?: Since inception, most of the outperformance has been generated by the currency markets. The breakdown of backtested returns across asset classes over a longer sample (Since January 1990) suggests a balanced contribution from equity, fixed income and currency components.

RISK MANAGEMENT
  • Discuss position and stop-loss limits and their management: So far _and despite numerous disruptions and ample volatility across markets since 2008_ the qCIO® Global Macro and GTAA Strategies has never applied stop loss limits. This is because risk is monitored at the overall portfolio level. However, were the qCIO® Global Macro and GTAA Strategies to be implemented at high tracking error levels (i.e. 15% per annum), we shall restrict exposure to each equity market to be less than 50%, each fixed income market to be less than 100%, and each currency exposure to be less than 75% of the portfolio, determined via advanced optimization techniques based upon the dynamic expected returns and risks forecasts of our proprietary models. These are loose constraints designed to limit overall leverage and probability of large drawdowns.
  • How often are these limits applied? When were their peaks observed?: The constraints described above are specified in the team’s portfolio optimization system. Optimal portfolio weights automatically reflect these limits.
  • How do you adjust your risk capital allocation when there is a significant increase in equity due to trading profits?: Realized gains and losses in foreign currencies are periodically converted into USD to minimize foreign exchange exposure. Unless specified otherwise by the client, the gains are re-invested into the strategy with the allocation across instruments being determined by portfolio optimization.
  • Do you use an external risk monitor? If so, who and why that particular one?: The qCIO® Global Macro and GTAA Strategies team does not use an external risk monitor. Q.M.S Advisors has developed its own risk management systems and developed tools internally to best monitor the risks linked to this specific strategy. Our proprietary portfolio management systems incorporate all risk measurements, such as Value at Risk monitoring tools. It enables the team to provide multiple types of analysis such as the marginal contribution to risk for each of the assets in the portfolio, hence ensuring that the portfolio is well balanced with no excessive concentration in a particular asset class or market. It also incorporates several different ways of measuring Value at Risk (i.e. traditional VaR based on normally distributed returns, or based on re-sampling methodologies, or on mixtures of distributions and regime switching variance-covariance matrices; features which more adequately capture extreme returns). Finally, the team computes the probability of loss at various horizons both at the end of the horizon and at any point within the investment horizon.
  • Please describe the operational risk management policy: Q.M.S Advisors monitors and controls both the investment processes and operational risks linked to the qCIO® Global Macro and GTAA investment strategies. To minimize operational risks, Q.M.S Advisors developed automated account reconciliation systems mapping our prime broker’s daily reports (i.e. cash, open trade equity, number of contracts, FX exposure) and additional risk controls specifically designed for our qCIO® Global Macro and GTAA Strategies (i.e. maximum limit on the number of contracts transacted, etc.). As an additional level of oversight,  Q.M.S Advisors ensures that performance is GIPS compliant, that risk measures are appropriate, and that the investment positions reflect the products to which our clients subscribed. Q.M.S Advisors further tracks the adherence to the investment guidelines and tracking error objectives, both of which are hard coded into the portfolio management system.
  • How do you measure minimum liquidity of positions?: The strategy trades futures contracts. These are exchange-traded, thus ensuring price transparency. Liquidity is a function of volume traded. Our qCIO® Global Macro and GTAA Strategies portfolio management systems include liquidity monitors. Those track, for contracts coming to expiration, the price differential between current and nearby contracts, average volume and open interest so as to ensure best execution.
  • What risk system/software is used in your middle office?: The qCIO® Global Macro and GTAA Strategies' team manages portfolio risk on a daily basis, through tools specifically developed for those processes. To control overall portfolio risk, gains and losses are tracked for each position in real time. Also we verify the consistency in the number of contracts held, open trade equity and cash by comparing the information reported by the futures broker and the Q.M.S Advisors accounting system. This check is performed automatically each day.

EXTERNAL CONTROLS
  • Are any third parties involved in verifying adherence to risk limits, e.g. the fund’s administrator?: Yes. The Risk Management division is independent from the portfolio management team. It monitors the tracking error of the portfolio and adherence to the clients’ guidelines. These are hard-coded into the trading and performance monitoring system. Any error or violation triggers an alert.
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