Hedge Fund Uses Japan to Predict International Equity Growth

By Benedicte Gravrand

GENEVA (TheStreet) -- Equipped with a couple of engineering degrees, Robert Page started his career at Lehman Brothers' interest rate derivative option desk. In the early 90s, the bank offered him the whole Yen derivative book to trade; he moved to Japan and built the book into a large business with 12 currencies.

"It was a very interesting time to begin trading in Asia," he says in a recent Opalesque TV interview. "I arrived in Japan the week that the Japanese Government Bonds market began its collapse of 1994. In my first week of trading, I learned that the market absolutely collapses for unforeseen events; that was my first trial by fire, the first time running a large amount of risk."

Page ended up being Lehman's most profitable trader. One of his most lucrative trades was on floors on Yen interest rate in the mid-90s. There was an element of arbitrage trading at the time. "What I took away from that," he notes, "is that sometimes models can be wrong and you really have to do your homework, extensive amount of research and then spot these opportunities."

Apart from the benefits of extensive research, his other lesson he gained from his experience is not to overtrade.

"Later on I moved to Credit Suisse, and there, they definitely had the appetite to run large risk, both in swaps and government bonds, in government bond futures," he explains. "What I found about running large positions is you don't need to overtrade them.

"You just have to do extensive research and be really confident in your position and that having done your homework allows you not to overtrade a good trade, and just sit back and let the trade work itself out. If you have done your work, you'll be the first or one of the early adopters of a trade, and then everybody who comes after will push your trade into profitability."

These lessons have taught him how to run significant positions in the macro space. Which is where he decided to go.

In 2012, together with Majed Sidani -- a Ph.D. and a veteran in financial research with experience at Lehman, Merrill Lynch and JP Morgan -- Page created SA2 Advisors, a London-based global macro investment management firm.

Their test case was Japan, as the Japanese equity market is "the poster child for why many models in equities don't work." This test case allowed them to find models that were much more responsive to equities.

"Japan still has challenges," Page says. So the country continues to provide them with insights into global markets.

Page and Sidani developed a model for forecasting Japanese equity returns for the long-term, and applied it to 40 to 50 countries, using the back pages of the Economist magazine. The model is designed for a country with declining growth and is applied to emerging economies or developed economies. It has shown to have a very good predictive power.

SA2's funds, the Bellwether Fund Core and the Bellwether Fund Plus, have returned 7% and 15.5% respectively since their February 2013 inception. Both are global fundamental quantitative macro funds, which use quantitative models for multi-asset trading in financial futures and government bonds based on macroeconomic fundamentals, and the Plus fund can be leveraged up to two times. They are listed in Opalesque's EManagers database.

The Core and the Plus funds returned 2.84% and 5.54% respectively in October. Comparatively, the Credit Suisse Global Macro hedge fund sub-index returned 1% (2.5% YTD) and the HFRX Macro: Multi-Strategy Index 0.66% (-3.39% YTD).

The partners at SA2 started trading 17 months ago; the return drivers were fixed-income and equities in Singapore in 2012, and equities in Southern Europe in 2013.

When you trade off fundamentals, there are a number of challenges, says Page. One of them is that you can typically be too early into trades -- a value trap.

"We have learned that one of the ways out of that is to not oversize things and to be very careful," he continues. "We had a small amount of exposure to Spain for the whole 17 months, and in Italy till the end of June.

"But by being early in small sizes, you don't need to have large positions to produce good returns, and that is why we like this marriage of fundamental and quantitative as a style." It is truly SA2's unique style, he adds.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

Opalesque was formed in 2001 to provide professional news services to participants in the alternative investment sector. Since inception, Opalesque has been providing premium online information services related to the hedge fund and investment industries. The Opalesque publication Alternative Market Briefing is the only daily hedge fund news service read by the elite hedge fund managers themselves (see our Testimonial page for more) Opalesque is led by Matthias Knab, an internationally recognized expert on hedge funds and alternatives. Mr. Knab has frequently served as chairman of hedge fund conferences New York, Greenwich, Miami, London, Monaco, Tokyo, Shanghai, Hong Kong, Bahamas, Stockholm and Dubai. In addition, he has spoken at or moderated panels at hedge fund events or Roundtables in Chicago, San Francisco, Scottsdale, Denver, Toronto, Geneva, Zurich, Frankfurt, Cannes, Singapore, Sydney, Melbourne, Cape Town, Madrid, Moscow, Sao Paulo, Rio de Janeiro, Cayman Islands, Bermuda, Auckland, Abu Dhabi and Bombay, and lectured at numerous universities on the subjects of hedge funds and the state of the global alternative asset management industry.

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