Abacus Fund Management will launch an innovative CTA hedge fund in January, utilizing a proprietary modeling system to predict which CTAs will be top performers over a 12-month period.
The master-feeder fund, which will hold from seven to 10 CTAs at a time, is still looking for a few seed investors for its onshore version.
Emil Van Essen, the president of Chicago-based Abacus and co-president of VanKar Trading, also in the Windy City, which developed the model, says his years as director of managed futures at the Bank of Montreal taught him that the standard systems for picking CTAs—Sharpe ratio and track record—didn’t work. They also didn’t give managers an idea of when to dump a bad CTA.
“Most fund managers pick a portfolio of CTAs and don’t really have a plan to replace them,” Van Essen says. “If one goes sour, they panic.”
Instead, Van Essen says, his model ranks CTAs every month and revalues them each quarter. If the resulting 12-month projection is too low for a CTA in the fund, it’s out, replaced by the highest-ranking CTA in the model. “It has nothing to do with recent performance or whether it’s hot or not.”
Everything’s not perfect: For instance, Van Essen says the model “picks a few too many option writers” – which “we know historically tend to blow up” – “because the real risk isn’t built into the model. So we have to use some subjective judgment on that, in circumstances where the model would not be able to adequately measure the risk.”
One thing he won’t use to second guess are macroeconomic events, “because the model’s pretty good at that.”
Van Essen expects to launch the fund with about $7.5 million in seed money, mostly from high-net worth individuals. It will employ two-times leverage initially. Abacus can still accept up to $1 million from seed investors, whom Van Essen promises “a fantastic deal.” The minimum investment is $100,000.
VanKar has used the model and its predecessors in the past for some family offices, and has been pleased with the results, Van Essen says. As for the hedge fund, “I think we just have to prove it out in real time.
“We probably have fewer liquidity issues because it’s driven by a model,” he says. “We could expand the model to 20 CTAs,” if demand requires more capacity.