(Bloomberg) -- Hedge fund manager Nigol Koulajian spent his childhood in the middle of a civil war in Lebanon, dodging car bomb blasts and gunfire for more than a decade. He fled to the U.S. at age 16, but the violence and chaos left an imprint on everything he does, including managing money.
“I grew up in a Third World country at war, so I’m always looking for the next crisis as a hedge fund manager,” Koulajian said from the safe confines of his midtown Manhattan office, where his Quest Partners manages $1.5 billion. “Emotionally, I’m wired differently than the typical New Yorker who grew up expecting to work in finance.”
Quest Partners, a commodity trading adviser that manages money for clients including New York City’s police and firefighter pension plans, is designed for the kind of turbulence that has rocked investors this year. The firm’s flagship AlphaQuest Original, which runs on algorithms, was up 16 percent in the first quarter, according to a document seen by Bloomberg.
But most CTA funds, including those run by Winton and Man AHL, suffered losses in the period. Societe Generale SA’s index of big CTAs dropped 2.8 percent.
It wasn’t supposed to be that way. Investors have flocked to the $350 billion industry since the financial crisis on the expectation that CTAs would provide insurance when markets tank.
Koulajian says his industry has veered from its roots. Over the last decade, CTAs have packed into long-term and bullish trades lasting several months while backing away from bets against assets, according to research led by Quest Partners’ Paul Czkwianianc. The strategy delivers small and steady gains with little volatility as markets rise, but at the risk of big losses when they correct.
“The whole point of CTAs was that they would provide protection during corrections,” Koulajian said. “And investors still have that expectation, but they invest with managers who don’t have that quality anymore.”
Looking for Volatility
Quest Partners lives for tough times. Its algorithms look for moments when volatility begins to surge and then pounces, aiming for big gains, betting both long and short. The trick is to have the discipline to let the crowded bets for small and consistent profits go by -- what Koulajian calls picking up pennies on a railroad track -- because at some point you’ll get clobbered.
The flagship fund, which wagers short-term on futures, currencies and stock indexes globally, performs like a roller coaster: up 56 percent during the onset of the financial crisis in 2008 and down 13 percent last year, according to the document. Investors willing to go along for the ride have been rewarded with an annual average gain of 11.4 percent over two decades, or about twice the gain of the S&P 500 Index and almost three times that of the SocGen index.
Koulajian, 50, who wears jeans to work like the young programmers who fill his office white boards with equations, was one of the early quants in finance. After getting a degree in electrical engineering from Notre Dame, he designed computer risk models on mortgage-backed securities as a consultant at Salomon Brothers in New York in the late 1980s.
He left consulting to get a MBA from Columbia, where the Lebanese native of Armenian descent hoped to make business contacts and start raising money. A few years later in 1999 he launched AlphaQuest with only $3 million.
After three years of robust gains, a fund of funds from Man Group became Koulajian’s first big investor. Today, four large institutional investors, including the New York pension plans and Canada’s Caisse de Depot et Placement du Quebec, provided about half of the firm’s assets. The pensions declined to comment.
Investors in AlphaQuest saw their worst loss in 2017 as volatility in several asset classes compressed to record lows. Its long bets on commodities fell as equities marched steadily upward.
This year’s rebound began in January, with winning bets on upward spikes on a number of equities. Days later, Koulajian’s models decided that the assets had become too rich. So the fund sold the equity positions and bet against stocks just days before the market began to tumble in early February. Other CTAs were blindsided.
“We took a beating, like everyone,” said Yves Balcer, co-founder of CTA firm FORT, which manages more than $5 billion. “From September to January, it was one-dimensional, then you have a sudden reversal.”
Still, Balcer doesn’t think short-term strategies like Koulajian’s have an edge over CTAs who hold bets for several months. He cites the SocGen indexes, which show long-term funds beating short-term strategies by a wide margin since 2008.
As markets keep rumbling on concerns about trade wars and rising interest rates, Koulajian sees more opportunities ahead. He’s now long gold and crude oil on the expectation of higher inflation and short smart-beta factors like momentum, which he says are overpriced.
“We’ve been catching little waves of vol,” said Koulajian, who meditates daily to relieve the stress from betting on volatility and develop ideas free of emotion. “But a bigger wave is coming.”
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