In Depth

Q&A: Omni Macro Fund Bullish On India, Watching China

Mar 4 2015 | 4:35pm ET

Omni Macro Fund was formed in 2007 by Stephen Rosen, previously a prop trader at JP Morgan. The $600 million strategy was up 5.7% in 2014 and is over three percent ahead so far in 2015. Rosen  is supported by Head of Strategy Chris Morrison, also a former prop trader at JP Morgan. In addition to Rosen and Morrison, the Omni team includes a quantitative analyst and a fundamental economist. FINalternatives recently caught up with the London-based team about their approach.

Tell us a little bit about Omni and how you operate.

Omni manages a high conviction portfolio of three to five themes, and they are each reflected in the portfolio by one to three positions, so that our book usually contains 10-15 positions total. This approach not only makes it easier for us to manage risk, but also for investors to understand what we’re doing.

We focus heavily on valuation and sentiment analysis to search out structural themes in liquid products. When something is cheap and unloved, it has the potential for convexity. And it goes both ways – we are just as interested in something that is highly priced, overvalued and over-owned to sell short.

If you’re investing around strategic themes, what is the typical holding period for a position?

Zero to 18 months. We look for highly liquid ways to trade these themes, and we have very high conviction when we put them on, so we’re typically very sure of something before we trade. Our expectation is that a trade will begin to work within six months, driven by the timing considerations of the macro opportunity.

What determines your entry point?

No good macro strategy is successful over the long term without the trading skills to take advantage of them. We utilize both our strong experience in trading and cyclical macroeconomic analysis to identify possible catalysts. Signals can come from surprises in macroeconomic data, movements in related asset prices and extremes in sentiment and volatility and we use these to time the entry and exit of our structural themes.

A lot of managers try to play strategic themes with tactical moves. What does Omni do differently?

It is true that a number of macro managers focus on momentum, whereas we are highly selective in our positioning and do not try to chase everything that moves. Instead we have a strong commitment to all our structural themes, which results in a longer holding period as the theme plays out. We marry that to our strong trading experience which enables us to manage the path of the trade around a core position in order to navigate the shorter term undulations in sentiment. In that sense our portfolio is not a collection of tactical trades but rather an actively managed pursuit of structural or strategic themes.

Can you give us an example?

Sure. For the best part of the last 18 months, we held the macro view that China could be vulnerable. It had massively built up debt, to the point where it reached an unprecedented debt-to-GDP ratio, and we intuitively knew that the process to unwind this unbalance would not be pretty. Then from mid-2013 onwards, you saw a move upwards in real rates, which spells trouble in a highly levered economy. Yet at the time, sentiment was nearly uniform in its expectation that China’s currency would continue to steadily appreciate against the U.S. dollar. This set up the potential for a convex outcome.

With our macro view in place, we waited for the data to start confirming our hypothesis before deploying risk to the theme. Sure enough, in January 2014, the Chinese PMI was weak, and that set the stage. For us, going long dollar/short yuan seemed like a big opportunity to play the slowdown we foresaw as well as the shift in sentiment that would result. We traded the theme using one-year forward currency contracts. Since then, the shifts in sentiment, which with China typically runs between huge peaks and valleys, has been fascinating to watch.

With a relatively concentrated portfolio, how do you manage risk?

We address risk a variety of ways. First, every position is already high conviction when we enter it, which means we’re very confident in both the macro foundation and the tactical entry point. At the outset, we size meaningfully at the correct entry point, which is partly determined by gauging sentiment and positioning from related market prices. For instance, with China, we looked at the renminbi spot price at the bottom of the band and noted that the forward points were trading very close to it. That implied the market was almost universal in its opinion the currency would rise, and that we had little risk of timing the trade wrong. Now that forward/spot ratio is the other way around. 

From there, we manage for volatility and noise. Sentiment and the degree of convexity development will drive us to take profits and adjust as necessary. Assessing sentiment is ultimately a qualitative judgment, but it is informed by quantitative inputs like volatility, momentum, demand for puts and calls, etc. In the background, we have lots of conversations to inform our view, not only to monitor the macro side but also the financial community’s view of it.

Everything we do is directional, and we’re not driven by asset allocation. We control the portfolio’s risk via P&L stops, a 3% loss in any one month, which limits drawdowns, and size accordingly. The portfolio’s construction is based on what the largest position can be and still allow us to handle the noise. We only trade liquid markets and simple instruments, so we can have this level of control.

The result is an uncorrelated return stream that does well during periods of market volatility. We have little correlation to equity, credit, or commodity markets, or other macro funds, and have 3-1 upside/downside volatility. This means we are adept at minimizing losses while letting our gains run.

What are some of the macro trends you see now?

Although we’re out now, we’re still watching China closely. We were short copper most of last year, and may return to that theme if the Chinese economy doesn’t start to pick up.

The big one for us right now is deflation versus reflation. The broad deflation theme from last year seems to be winding down, and benchmark bond yields have probably reached their nadir. We might be in a position where deflationary fears ebb a bit, which would create a better opportunity for emerging markets and commodities. At the same time, though, we’re a little worried that U.S. data is starting to disappoint, which could be troublesome since the whole world is long the dollar.

We are a long-term structural bull on India. An interesting way to play India is long rupee/short Canadian dollar, which reflects an oil-importing country versus an exporting one. Incidentally, we’ve never viewed falling or rising oil as necessarily good or bad, we tend instead to focus on winners versus losers. In this case, falling oil is a clear win for India and will cause headwinds in Canada, so that’s how we’ve started to think of the theme.

We also like Japan, which has a lot of tailwinds at the moment: falling energy prices, quantitative stimulus, etc. We’ve started to get long Japanese equities to pick up this reflationary shift. We draw a big distinction between oil price deflation and the debt deflation we saw from 2009 to 2011. For countries that consume oil, the drop will be reflationary.

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