Over the past 30 years, Capital Fund Management (CFM) has scaled to over $15 billion in AUM by adopting a scientific, academic approach to investing. One of the central cogs in this quantitative machine has been Philip Seager, now head of Portfolio Management at CFM. Seager notes that the central pillar of CFM’s investment approach has been “identifying statistically significant effects.”
One of CFM’s strategies for continuous scaling has been to combine multiple uncorrelated strategies to create an uncorrelated portfolio across equities, fixed income, and commodities. This can improve risk-adjusted returns, as low correlations are apparent across several asset classes. CFM’s deep research function has seen it collaborate with academics, leveraging their broad datasets, to conduct extensive analysis of portfolio construction. Nearly half of CFM’s research team purely focuses on this area, with Seager noting that the philosophy is centred on building “robust portfolios over optimal ones”. This mindset has placed the firm in a strong position to manage the recent volatile environment; due to the strong emphasis they place on risk control within their portfolios.
A key finding from CFM has been the role of equities within a portfolio; not just their presence, but how they complement other assets. Most investors, particularly those in the private wealth space, have a heavy exposure to equities. This is fundamentally down to the higher Sharpe ratio that equities deliver and has done since the GFC. Seager notes that “For institutional and private investors with a significant exposure to equities, that Sharpe ratio was closer to 0.3, but since 2008 US equities have delivered much higher Sharpe ratios, which has made investors more hesitant to diversify.”
CFM’s quantitative approach means the firm is consistently looking to sharpen its edge when it comes to analysing and utilising data. Seager believes the role of “alternative data” is going to be crucial in the years to come for hedge funds, as they find data sets that go beyond traditional sources and are not directly accessible from a Bloomberg terminal. One example that Seager gives is credit card data, which provides “real-time insights into consumer spending, much faster than traditional economic reports.” CFM has a dedicated data scouting team that travels the globe, attending conferences and events to speak with data providers, to source unique data sets and feed them into their models to process and identify patterns.
Watch the full alternative views interview with Philip Seager below