Trend setter: EuroHedge meets Leda Braga

Three years on from her split with BlueCrest, Brazilian hedge fund manager Leda Braga is enjoying independent life

Leda Braga has a passion for computer models, maths and motorbikes. And not necessarily in that order.

“I love motorcycling – you get this great sense of freedom,” she says, before enthusiastically explaining the technique. “When you ride a motorcycle, you don’t want to brake during a corner, you want to approach the corner at the speed you’ll turn it.”

That philosophy served her well in 2008, a breakthrough year for Braga and the systematic trend-following strategy she has honed since the early noughties. BlueTrend, the CTA program she managed for Michael Platt’s BlueCrest, had performed superbly in its first three full years of trading, averaging almost 20%. Then the dominoes of the financial world began to tumble.

“Investors were nervous in 2008, with Lehman failing and everything else, and some thought we should cut risk,” she says. “But if you looked at the situation objectively, and our underlying assumptions, it was clear our algorithm was responding and cutting risk where it needed to.”

Braga believed in the model. “One of the characteristics of systematic trading is that you consider several measures of volatility at any one time,” she adds. “Higher volatility does not mean you need to panic and adjust the system.” Her faith was rewarded as BlueTrend delivered a record 43.3% annual return.

A decade on from that transformative year, Braga has agreed to an interview at the Geneva office of Systematica Investments, the firm she started after splitting from BlueCrest in 2015. The white Ducati Monster 700 motorcycle has gone – “the mountain roads around Geneva are extremely technically challenging” – but BlueTrend remains, as does Braga’s passion for computer models and fund management.

“Trend-following adds a defensive characteristic, the ability to go short when no one else has the mandate or desire to go short – which helped deliver the 2008 return,” she says. Systematica now manages $8.7bn, making Braga the leading woman in the global hedge fund industry. Motorcycling aside, her enthusiasm for the business she has built is palpable during 90 minutes spent in her company.

We have re-shaped the firm and started different products. Systematica is not just BlueTrend – we are a diversified business

“It has been very rewarding and refreshing to build a business with a distinctive culture and team spirit,” she says. It is also a very different business to the one she started more than three years ago. Assets are at a broadly similar level. But BlueTrend then represented about 90% of assets; now the $4.8bn program’s share has fallen to 55% following diversification into new strategies including OTC markets, relative value macro and alternative risk premia.

“It has also been great to renew the business,” says Braga. “We have re-shaped the firm and started different products. Systematica is not just BlueTrend – we are a diversified business.”

Investors were previously offered BlueTrend and BlueMatrix, an equity market neutral strategy, but can now access the firm in multiple ways. “We offer a range of new fee structures, liquidity terms and strategies, some of which are very sophisticated,” she adds.

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We are meeting at the end of February, a bruising month for trend-following CTAs, which use computer models to trade in hundreds of liquid markets, seeking to profit from trends. “Markets have been tough in the past three years,” she admits, despite a strong start to independent life. Systematica’s first month could scarcely have gone better, as BlueTrend delivered a 9.5% return in January 2015. By the autumn of that year the firm had overtaken Platt’s shrinking BlueCrest operation (which no longer runs client money) in terms of assets.

BlueTrend ended 2015 up 3.4% but lost 11% in 2016, its second annual loss in four years. “It was not nice,” says Braga, but she hopes investors have become more used to the return profile typically offered by CTAs. “Investors have become a lot more technical and could see why we made those losses – the big trend reversals, the sideways markets, particularly in commodities. That is not an environment that is propitious to trend-following. But I think investors tolerate the downside risk because BlueTrend has proved itself capable of huge gains.”

Last year BlueTrend edged upwards by 1.8%, and started this year with a 6.9% gain as it profited from the upward surge in equities and other markets. The market rout in February undid the progress as BlueTrend lost 9.1%. “Trend-following is a directional business and the market choppiness did not help us,” she says.

BlueTrend was by no means the only trend-follower to lose ground: flagship CTAs managed by European rivals Winton Capital, Cantab Capital, Aspect Capital and Man Group also suffered. The SG Trend Index, which tracks performance of the ten largest trend-followers globally, including BlueTrend, lost 9%, its worst month in 15 years.

“Recent moves in markets have impacted our investment performance in some areas, particularly for our momentum strategies,” said Luke Ellis, chief executive officer of Man Group, at the end of February. Man AHL Alpha is another constituent of the SG Trend Index.

Managers in the space are not overreacting, preferring to trust in their models. February’s market reversals are “not likely to scare systematic trend managers as they are within expectations over a market cycle and our risk management is built with the long term in mind,” says Anthony Lawler, co-head of GAM Systematic, which houses Cantab.

The hope for systematic managers is that investors agree. “Volatility spikes usually create a less favourable environment for trend-followers,” says Philippe Ferreira, senior cross-asset strategist at Paris-based Lyxor Asset Management, which manages €17.2bn ($21.3bn) in hedge funds on behalf of clients.

“CTAs had profited from the upward trend in equities but were exposed when it reversed. Equities tend to rise with bond yields but the latter, combined with fears over inflation, helped cause the market rout – and trend-followers were wrong-footed.”

Lyxor, which does not currently invest in Systematica, has a recommended exposure to CTAs of 10%. “Our allocation to CTAs was small because we thought the sector was over-exposed to equities,” says Ferreira. “The sector has deleveraged its exposure following February’s market rout and volatility, and we might increase exposure now.”

Ferreira does not believe allocators have lost faith in CTAs – far from it. “Institutional investors continue to see CTAs as a risk mitigation strategy, which is justified in light of their 2008 performance,” he says. “Trend-following CTAs identified shifts in price pattern actions and were able to profit from the resultant trends while most managers in other strategies lost money.”

Braga does not believe we are on the cusp of another 2008. “Look at the fundamental numbers. There is a wave of growth worldwide, Europe and Asia are doing better and the US is undergoing some positive changes with tax reform. I don’t see a big crash coming.” She has some sympathy for the opposing view, however. “Markets feel a bit toppy, both on the fixed income and equity side,” she says.

In the event of another epoch-defining crash, however, BlueTrend would be ready to benefit – and even more so than in 2008. “We trade a more diversified set of markets now and our execution costs are lower,” she says. “So, if the price action was to repeat, we would make more money now. A repeat is extremely unlikely – but in the event of another sustained market crash our system would adapt and post strong gains.”

A data-driven opportunity
A few days after our interview Braga escaped the bitingly cold Geneva winter for the warmer climes of California. She was delivering a keynote speech at the Women in Data Science conference hosted by Stanford University. Her message, the product of decades working in complex fields of academia and finance, was a simple one: join in.

“Investment management is an activity whereby the pools of capital of the world get directed,” she told the conference. “That is so powerful. And if that is going to become data-driven over time then you can’t miss that opportunity. You’ve got to join in and have your say.”

It is a mantra Braga has lived by ever since arriving in Europe more than three decades ago as a student in her early twenties. Born in Rio de Janeiro in the 1960s, with Brazil in the grip of a military government, a passion for numbers led her, improbably, to Imperial College London.

She arrived at the university in 1987 and initial success led to postgraduate study under the tutelage of the late Cedric Turner, a professor at Imperial, and eventually a PhD in engineering. “I have always been driven by numbers and mathematics and physics,” she tells EuroHedge. “That led me into engineering, which is all about solving people’s problems: if you want to cross a river, the engineer builds you a bridge.”

She worked as an academic for three-and-a-half years before the world of finance came calling. “At that time all the buzz surrounded the financial work going on in the City of London,” she says. “It was the derivatives boom and banks were hiring staff from my academic background.”

Braga had a “fantastic” time at JP Morgan working as a quantitative analyst in the derivatives research team. There she met Michael Platt, the Preston-born trader who was making a fortune for the US bank in interest-rate swap trading. He recruited Braga to join his developing team at BlueCrest in 2001, the year after he founded the firm. She soon enjoyed meteoric success developing a systematic trading strategy, which became BlueTrend.

Though BlueCrest colleagues were supportive, she remembers how some sections of the fund management industry bridled at the rise of systematic trading. “In the very early days of BlueCrest, going back 15 years or so, we ran some FX boxes,” she says. “Banks would occasionally call us and say ‘you’re picking us off, you’re picking us off!’ – that our systematic trades were affecting market moves in various ways.”

She cites this as evidence of the “spooking” effect computer-driven trading can have on more established parts of the finance world. “It was purely emotional – we would respond by looking at the data and the data didn’t support the assertion,” she recalls.

Braga believes there is a fear of algorithms when it comes to using more science and technology in investment management. “This ‘algorithm aversion’ has been documented in academic papers,” she says, though she believes attitudes are changing.

“People are becoming more used to the fact that algorithms and machines do a very good job. The amount of data you need to capture and process is way beyond the ability of one or two or ten brains, but well within the range of our computational power.”

BlueTrend’s outstanding success in 2008 helped put the strategy – and Braga – on the hedge fund map. Industry recognition and awards followed, the success compounded by another impressive gain of 16% in 2010. This decade has been harder, with a lack of trends in markets dampening performance. Returns were flat in 2011 and 2012 before BlueTrend suffered its first annual loss – of 11.5% – in 2013.

That was the year the program’s assets peaked at $15.4bn (and BlueCrest’s peaked at $37bn). Redemptions followed, though investors who lost patience with the strategy may later have regretted it: BlueTrend returned 12.7% in 2014.

Braga left BlueCrest at the end of that year. The terms of her departure, which allowed her to take over the running of BlueTrend at Systematica, were not disclosed, though BlueCrest took a significant minority stake in the new firm. “The spinout was to maximise opportunities and to provide Leda with a new challenge to lead her own business,” Platt said at the time. “It’s good for clients, us and Leda alike.”

Systematica’s ownership situation changed in November 2015 when Affiliated Managers Group (AMG), a listed Boston-based firm which takes stakes in fund managers, purchased the majority of BlueCrest’s stake in Systematica.

The deal was struck after Andrew Feldstein, the co-founder of BlueMountain Capital Management (in which AMG has had a stake since 2007) and a fellow JP Morgan alumnus suggested to AMG’s management they take a look at investing in Braga’s firm. That referral “made our relationship-building that much stronger from the beginning,” Sean Healey, AMG’s chairman and CEO, tells EuroHedge.

“Leda and her partners are certainly very highly regarded,” he says. “Our partnership with Systematica has been very strong so far. AMG’s approach preserves the essential elements of our affiliates’ unique operating and investment cultures.”

AMG has stakes in 15 alternative firms, including AQR Capital Management, Cliff Asness’s $224bn Connecticut-based juggernaut, which it has held since 2004. This side of the Atlantic,David Harding’s Winton Capital is the only direct trend-following rival of Systematica’s to be an AMG affiliate.

A listed firm which manages $836bn, AMG helps affiliate firms with “marketing and distribution, global compliance and regulatory support, and support in strategic matters such as incentives and succession planning,” explains Healey.

Braga has appreciated AMG’s support during the development of Systematica.

“AMG has a very experienced management team,” she says. “They act as advisers we can rely on for guidance or just a chat, and provide industry data to help us improve what we do. They are in it for the long-term, which is a great institutional vote of confidence in what we do.”

There is an advantage from a marketing perspective, too. “When we meet potential investors and explain our ownership situation there is a strong likelihood they have heard of AMG, through one of the other managers they hold,” Braga adds.BlueCrest, which continues to hold a small stake in the firm, declined to comment for this article, though relations appear cordial. Braga is enjoying her new-found sense of freedom running her own firm. “My job scope is narrower now,” she says. “I also worked on the discretionary side at BlueCrest, providing models and technology.”

Braga is aware of her position as the leading woman in the global hedge fund industry, with Systematica far bigger than other women-led firms and funds, but does not dwell on it. “I don’t see myself as a role model – I just wake up each day and get on with the job. I am very lucky to have a brilliant team here.”

She is aware, however, of an imbalance in the industry. “In terms of our hiring, women turn up for interviews less than men, which is a consequence of the fact less women go into finance in the first place,” she adds. “That needs to change.”

The human touch
Despite her belief in the models underlying Systematica’s bets, Braga acknowledges that computer strategies are not perfect. “The algorithms are not so good at big-picture themes and issues,” she says. “Humans are better at spotting some investment theses (for instance, that companies with strong financial statements ought to perform better because of a better quality of earnings).”

Teaching the computer about those kinds of relationships is the challenge. “Humans are better at assessing things that are less tangible, like mood and sentiment – though Systematica attempts to do that with language processing, for example,” she adds.

“The downside for human traders is that emotion can cloud your thinking, as well as help it. But we are incorporating some discretionary techniques into what we do: gearing our systems to focus on particular themes, or incorporating market views so some trades are prioritised over others.”

It is one of the messages she is passing onto investors, as she seeks to explain Systematica’s diversification away from BlueTrend. The program, which manages $4.8bn and trades more than 200 liquid markets, remains the flagship. BlueMatrix, the second survivor from BlueCrest, manages $1.4bn.

Systematica Alternative Markets, which trades more than 200 OTC markets, launched in October 2015 with a $300m external seed investment and assets now stand at $1.7bn. It picked up a EuroHedge award for its performance last year – a 24.1% gain with a Sharpe ratio of 3.1.

Systematica is one of several European CTA managers to diversify into alternative markets funds, with Aspect Capital the latest last year. Man Group AHL’s $3.4bn Evolution program revealed the potential of trading OTC markets systematically by performing notably well earlier in the decade when other CTAs struggled.

Systematica Macro RV, which offers a relative value strategy in the global macro space, launched last June and runs $148m. Braga refers to those four programs as “alpha strategies” in contrast to two “scalable alternatives,” both launched last year, which only charge a management fee. The smaller of the two is Systematica Trend Following, a $309m program trading in 90 of the more straightforward liquid markets.

The larger, weighing in at $715m, is Systematica Alternative Risk Premia (SARP), which focuses on what Braga describes as a “fascinating area” for the industry. “I think the investor uptake of our new product demonstrates that,” she says. “There is a desire for balanced strategies, and the ARP strategy has a lot of different aspects, each with a little bit of risk.”

The remainder of Systematica’s $8.7bn lies in customised solutions and allocations made in a bundle to the firm’s four “alpha” strategies. “The product range is settled for the moment,” says Braga. Her inspiration for expanding the firm’s offering appears to have come, in small part at least, from across the Atlantic. “Everyone in this industry looks up to Renaissance,” she says. “They are an example of a well-run firm that has differentiated its range.”

It is clear from the slew of recent product launches that Systematica has capacity to grow and Braga is working hard to raise assets. “It is an exciting time – that’s why I was in Australia last week,” she says. The team believe there is scope to grow the business, particularly among investors in continental Europe, due to ongoing strong interest in Ucits products there. Most of Systematica’s programs are now offered in Ucits format, with BlueTrend available on the GAIA platform managed by Schroders.

Braga rejects the notion that the CTA sector has grown too big, with a series of big names offering trend-following strategies and some investors thinking it is becoming commoditised. “All the assessments we have about CTA trading style, speed and assets size indicates the market is still relatively small,” she says.

She also gives short shrift to accusations from some, including Californian fund of hedge funds Paamco, that CTA strategies worsened the market rout and volatility in February. “It is very easy to blame the algorithm, you are not offending anyone,” she says. “But if you were to model Systematica’s impact on markets last month, and expand it to represent the entire CTA universe, it would actually be quite low. CTAs are an easy scapegoat.”

Braga also sets the record straight on Systematica’s location after headlines last year suggested the firm was moving staff from Geneva to London. “We never decided to move staff back to London,” she says. “Some chose to be based there, but equally some staff have decided to move to Geneva.”

The bulk of staff remain in Geneva, with London another key office, where the firm bases its graduate trainee scheme. “Generally in Europe we try to accommodate the wishes of staff when it comes to location,” she adds. “The one place we occasionally ask staff to move is our Singapore office, which we use to trade Asian markets.” Jersey is the regulatory headquarters.

The investor relationship
Our meeting over, Braga gives me a quick tour of the office, pointing out a shelf where staff have lined up “tacky souvenirs” (including a Donald Trump baseball cap) brought back from holidays around the world. She parts by reflecting on the nature of the industry she finds herself in, years after leaving Brazil and her subsequent pivot from academia to the City.

“The hedge fund industry is a very special business. I came from a banking background, serving clients, but hedge funds are different. The relationship with investors is deeper. Investors trust you with their money.

“Banks provide services, just like a painter does – a painter might paint your wall badly, but you know they won’t take your house away. In this business investors trust us with their assets – and it is important never to forget that. Investors focus closely on the principles and values of senior management, so we all observe the highest standards possible. It is a very personal business.”

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