Estlander to build on long-term track record with short-term trading launch

September 23, 2013  

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Established in the early 1990s, Martin Estlander’s directional systematic firm has become the best-known hedge fund manager in Finland

Over the past 20 years or so, Helsinki-headquartered Estlander & Partners has made a name for itself with its dynamic and successful systematic trading strategies, which have plotted a generally steady course through the often stormy waters of managed futures and systematic macro investing.

Its funds have attracted capital from investors both domestically and internationally, turning a once-modest automated trading outfit into Finland’s most high-profile hedge fund firm, now on its way to the $1 billion mark for assets under management.

With three successful hedge funds already well established, the firm is gearing up to launch a fourth fund later this year that will draw on its research history and provide investors with a targeted exposure to short-term systematic trading strategies.

CEO and CIO Martin Estlander studied computer science and economics in the 1980s, before starting out as an equity trader and then becoming involved with trading derivatives instruments as co-founder of options market-maker Sophos in Stockholm.

A year later, he became director of Servisen Arctos & Partners in Helsinki, going on to co-found the firm’s market-maker on Eurex alongside colleague Kaj Rönnlund. Around this time, the duo began developing the automated systems and models that would later be used by Estlander & Partners’ systematic hedge funds.

After a management buyout in 1992, the firm changed its name to Estlander & Rönnlund. For the next 11 years, the firm’s trading activities spanned both futures – Estlander’s area of focus – and options, which were Rönnlund’s speciality.

During the 1990s, the firm’s futures trading operation developed and ran two systematic strategies that continue to manage the bulk of AUM today: the quantitative multi-strategy Global Markets Program, and the short to medium-term AlphaTrend managed futures strategy.

"All Estlander & Partners strategies date back to 1991," says Estlander. "We’ve had a very trading-oriented culture right from the start, with great passion for the financial markets."

In 2003, the decision was taken to focus entirely on these futures strategies, and the existing options business was jettisoned. "We saw so many more long-term opportunities in futures trading, and also in managing assets for clients," Estlander recalls – explaining that the firm’s options business had been primarily focused on proprietary trading.

"We wanted to purify that and make the whole thing nice and clean, investing our money directly alongside our clients without any portion in prop trading," he continues. "And we also wanted to concentrate all of our research resources on this one area: futures. We were keen to focus on one thing and do it well."

Rönnlund left the firm in 2007 with Estlander and other colleagues acquiring his shares – and resulting in another name change, to Estlander & Partners.

The firm had been managing client capital in the Global Markets strategy, while the Alpha Trend CTA strategy had been operated via a proprietary managed account run by its developer, Jan Haraldsson.

In 2008, Estlander & Partners began offering Alpha Trend to investors via a pooled fund – and it has since become the firm’s largest strategy by assets under management.

Both Alpha Trend and Global Markets are trend-following strategies. Global Markets runs a systematic multi-model portfolio applied to commodity futures, financial futures and FX. It uses a combination of price-based and fundamental criteria, and combines high-frequency trading with long-term holding periods.

Alpha Trend has a generally shorter-term outlook than the Global Markets Program – and many other CTAs in general – as it focuses on short- to mid-term holding periods. The strategy is price-based and invests solely in exchange-regulated futures, trading 74 markets.

Estlander describes the Alpha Trend portfolio as "very selective and narrow" – holding up to 45 positions, and sometimes fewer than 10. It has a distinct focus on natural resources, with more than 40% of the portfolio invested in this area.

Since launching in October 1991, the Alpha Trend strategy has produced an annualised return of 11.27%. It is up by 4.08% this year to the end of August, compared with a flat EuroHedge Managed Futures Index. Global Markets is down by 5.43% YTD – far less than many other prominent CTAs – but has made 6.86% annualised since inception in 1991.

The firm launched a third investable hedge fund in 2010, again building on its two-decade track record.

Estlander & Partners Freedom offers combined exposure to the two existing strategies. It is a blended offering rather than a best-ideas approach, and gives roughly equal weightings in its exposure to Alpha Trend and Global Markets. Since launching three years ago, Freedom has been rolled out in a range of investable formats, including a UCITS fund and segregated managed accounts.

"The other funds tend to be more for offshore investors who are looking to complement their other CTA exposures – in the case of Alpha Trend – or who want to add more systematic global macro exposure, via Global Markets," says Estlander. "Freedom appeals to pension funds, onshore investors, and those looking for more diversified systematic and CTA exposure."

Estlander & Partners currently manages around $860 million, with all three strategy approaches holding a decent share of the total.

Alpha Trend is by far the largest by AUM, managing $496 million as of July, while Global Markets is running $217 million and Freedom holds $147 million. Despite being the smallest and newest strategy in the firm’s range, Estlander describes Freedom as the flagship offering – a reflection of its more diversified nature and its broader appeal with large institutions and the growing onshore market for hedge funds.

Estlander does not believe his firm should push one strategy over another, and is happy for investor demand to dictate the AUM split between strategies. He believes Alpha Trend’s successful accrual of assets to date "is partly because it is so different from other CTAs, and that can be very appealing to investors".

Investor appetite has been a key factor in the decision to launch a fourth vehicle, to be named Presto, in the fourth quarter this year. Whilst Freedom presented an expanded offering, spanning both of the firm’s existing strategies, the new fund will be a narrowed-down proposition that gives investors access to a subset of the Global Markets Program.

The fund will focus on the short-term trading aspects of Global Markets, excluding the longer-term macro sub-strategies and resulting in a portfolio of trades that will typically be held for just a few days. The fund’s name – presto meaning 'quickly’ – is a direct allusion to its focus on more temporary opportunities.

"We’ve put a lot of research and effort into developing the platform, and into developing this strategy," says Estlander, adding that the decision to launch the new fund was based on a combination of opportunity set and investor demand for a standalone short-term trading vehicle.

Presto is likely to be relatively small at launch, with the aim of establishing an audited standalone track record before actively targeting investors. "It’s the Nordic way, and we have a saying which is that 'Finns don’t believe until they see’," says Estlander.

The upcoming launch is a good example of how the firm has adapted and expanded its activities from the very beginning: by enhancing and developing its expertise and trading processes, resulting in new products that are intrinsically tied to its existing strategies and approach to systematic investing.

As Estlander says, his is not a firm that broadens its reach to encompass new and unfamiliar investment strategies, but one that digs deeper into its own trading history to find a new way of doing things.

An Estlander & Partners marketing presentation refers to its 'focus on refinement rather than revolutions’. For Estlander himself, this is fundamental to the firm’s philosophy.

"We don’t change our strategies too much over time," he says. "Investors can rely on the fact that we’re true to our origins. People know we will be looking for directional trading opportunities, but that we might be doing it in different ways. They know pretty much what we will produce, but perhaps in a broader portfolio or with different time horizons.

"So we’re all about refining our ideas, rather than – for example – jumping into merger arbitrage and playing in that field. And we do not believe in adapting the strategy to recent market conditions."

Finland is home to a small handful of other hedge fund outfits, but Estlander & Partners stands out for its size and international presence. Estlander, who is himself a Finn, believes the country is an ideal location in which to work and reside – with many benefits for an entrepreneurial firm.

"Finland has been rated as the best place to live, for whatever reason," he says, referring to a Newsweek ranking of 2010. The firm’s marketing materials also cite the Economist Intelligence Unit, which has name Finland as the 'best business environment in the world’ from 2009 to 2013.

"People believe taxation here is very harsh, but there are good sides to that as well," says Estlander, referring to good public services including an education system that regularly receives praise internationally, and adding that business taxation is actually very competitive.

"As a hedge fund, we’ve found the Finnish regulator to be very proactive," he adds. "They are very supportive of our business and we have a good dialogue with them. Regulation is very burdensome, but in the long term I think it can be a positive thing, as it brings comfort for investors. In Finland we have had regulation for a long time, and that allows for onshore funds. As a result, investors are used to the idea of hedge funds."

Since 1998, Estlander & Partners has worked closely with Finnish universities – notably in Vaasa, where the firm houses its operations, trading and portfolio management activities (the firm also has client relations outposts farther afield in Munich and Zurich as well as in the US in Stamford, Connecticut).

As a result of its academic connections, the 35-strong firm has attracted high-quality local research talent over the years, and Estlander is proud of his firm’s track record of staff retention. Employees have typically stayed with the firm for seven years on average.

"The corporate culture we have is one of our biggest assets, and people are quite inspired working here," he says. "We have a very low turnover – we’ve not really lost any of our research people over the years. And we have been able to attract people to join from abroad as well."

Estlander acknowledges that systematic strategies have had a tough time of it since 2011, with CTAs in particular taking a hit en masse. But while he agrees the environment has been challenging, he also sees reasons for optimism.

"Commodities have been really, really sold down, so they are very cheap at the moment," he observes. "And volatility is low now, which typically is a good thing for commodities and CTAs."

Recent poor performance by CTAs may have deterred some near-sighted investors, but Estlander believes the time is right to be invested in such strategies – noting that managed futures funds are generally liquid, dynamic, and able to capitalise on up and down markets.

"If and when the world economy kicks in, commodities have the potential to do very well," says Estlander. "Overall, opportunities are good right now."

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