Alternative markets give edge to Florin Court strategy

By concentrating on exotic and alternative markets, Florin Court Capital Fund has sidestepped overcrowding and correlation to the main trend following commodity trading advisers, offering investors a diversified alternative to the standard systemic macro strategies on offer

Douglas Greenig, Florin Court Capital

Comparing and contrasting commodity trading advisers (CTAs) and their fully systematic programmes can be a struggle for many investors. Douglas Greenig, chief investment officer (CIO) and founder of Florin Court Capital, believes the firm offers something different from typical CTA strategies: a highly diversified systematic macro strategy focused on ‘alternative markets’ as diverse as French electricity, Chinese commodities and Colombian interest rates. The strategy, he says, has low correlation to stocks, bonds and commodities, as well as reduced correlation to and better performance than typical funds offered by CTAs.

The foundation of Greenig’s thinking began at university, where he studied macroeconomics at Princeton and then earned a doctorate in pure mathematics at Berkeley. Here he studied a branch of mathematics known as ‘topology’, sometimes referred to as ‘rubber sheet geometry’, in which one studies the properties of objects under continuous deformations and other transformations. At its most basic, topology is the study of shapes and spaces, looking at what happens if geometric objects are stretched or squeezed but not broken. While this esoteric area is not the usual background for most CTAs, it introduced Greenig to the study of ‘dynamic systems’, the mathematical field dealing with the evolution of complex systems. 

His pursuit of this area led him to his first life-changing decision: rejecting academia in favour of a job at Goldman Sachs. He originally worked as an assistant to Fischer Black, who was best known as one of the authors of the famous Black-Scholes equation, the seminal option-pricing model. 

From that foundation, Greenig eventually ended up, via a few other firms and a range of experiences (including RBS Greenwich Capital, where he ran mortgage and quant trading) to London as a member of the Man AHL team. Indeed, four of the six managers at Florin Court come from this quantitative house, including David Denison, deputy CIO; Antony Vinitsky, both chief operations and risk officer; and Matt Stevenson, head of product management. The only member of the management team without an AHL background is the chief technology officer, Peter Hollobon, and head of trading, Alex Smyth. Hollobon came from Renshaw Bay, where he was a senior developer until 2015 and, before that, CQS. Smyth had worked as a trader at BHDG Systematic Trading.

This team runs the Florin Court Capital Programme – a fully systematic macro strategy that concentrates on alternative and complementary markets and spreads. For example, while the vast majority of CTAs will be concentrated in developed market risk exposures in bonds, equity indexes, foreign exchange and commodities such as oil, Florin Court focuses on other, less efficient markets, such as electricity, emerging market interest rate swaps, exotic commodities, cryptocurrencies and developing market cash equities, to name a few of the more than 300 markets traded.

Focusing to stand out

As the CTA sector became more crowded, there were two ways to stand out. One was to try harder and harder to add to sophisticated models, or as Greenig says: “You end up squeezing a rag with water harder and harder to get another drop. Your knuckles turn white. The other approach is to look up and focus on markets where there is more juice. It’s a better approach.”

By looking for less efficient, operationally difficult markets that trend differently and are not used by the big CTAs, Greenig believes he is able to offer investors a diversified product that should perform well regardless of the direction of stocks and bonds as a whole.

The idea for Florin Court’s programme began to germinate when Greenig was still at AHL, one of the first CTAs to exploit an exotics programme. “The basic approach makes sense. Look at greener pastures that are less well picked over,” he explains. While there are other CTAs dedicated to alternative and exotic markets, he says Florin Court has a singular focus on alternative markets.

Fund facts – Florin Court Capital Fund Programme

Launch date: April 1, 2017
Style: diversified systematic macro/algorithmic
Target volatility: 10% a year after fees
Performance: 15.56% (2019); +1.91% year-to-date (July 31, 2020)
Assets under management: $750 million (at August 2020)
Investment manager: Florin Court Capital LLP
Base currency: US dollar
Minimum subscription: from $1 million
Management fee: from 1% per annum
Incentive fee: 20%, subject to high-water mark
Hurdle rate/high-water mark: 3-month T-bill, depending on share class
Liquidity: monthly, 30 days’ notice
Lock-up: depending on share class
Structure: Cayman master/feeder
Fund administrator: Citco
Auditor: KPMG
Prime brokers and custodians: JP Morgan Securities and Merrill Lynch International
Legal: Schulte Roth & Zabel, Maples & Calder

While most CTAs trade in around 100 different futures contracts and forex forwards, Florin Court trades in more than 300 exotic markets that generally have low correlations to each other and to most developed markets. For example, Florin Court’s markets include Chinese rapeseed oil, US electricity, Turkish interest rates and emerging market currencies. The team is constantly looking to add to the list.

“The markets where we trade are amazingly diverse. Then we allocate to maximise that diversification, which Is extremely important. We are exotic market guys. It’s not an add-on; it’s our main goal. We go out and look for markets, specialist commodities and identify markets where there is enough liquidity and are interesting to trade.”

Once a market is identified, the team studies it, including trading challenges. “Vinitsky’s speciality is to overcome operational difficulties in a safe way,” adds Greenig. Keeping costs down is another challenge as, if not controlled, can affect performance.

The models used are similar to other CTAs, following price trends but in unusual markets. “We were one of the first CTAs to trade bitcoin before there was a future on it. In our case we used exchange-traded products. We investigated an adequate and safe way that didn’t give us custody problems. We’ve done well in bitcoin and ethereum, too. We participated in these markets with meaningful amounts of money but with very controlled risk,” says Greenig.

Most CTAs, he explains, are similar to each other. There are usually only two key dimensions over which CTAs differ: model speed (going after short versus long trends) and market allocation. CTAs with medium to slow trend models in developed markets account for the vast majority of the sector, says Greenig, and are generally correlated to each other.

“Most of the good shops are sophisticated and do similar things, which is why the correlations are high in the CTA space and why people came out with low-cost CTA replications. It’s not exactly rocket science,” he adds.

Like most systematic programmes, the model is rarely changed, with only occasional improvements and modifications. “Think of it as a driverless racing car, controlled by sensors in a computer. Monitoring is constant,” he explains. “The computer is telling you all sorts of things, such as fuel consumption, heat of the engine, pressure. It is watched closely to make sure the engine is performing as intended and that’s what we do – we monitor the statistics on slippage and on portfolio risk.”

The difference is in the markets traded. The information on the markets is similar: bid/ask spreads, liquidity, how to trade the market. “Trading 100% systematic does not reflect personal views on the market. The trading system is locked into place.”

The Florin Court difference is in the specialisation on exotic and alternative markets. Finding interesting markets is not that hard, says Greenig. Talking to dealers and financial institutions about what is trading and why helps throw up new opportunities. “The hard part is the operational hurdles. Before we go in, we want all the facts. It is really operationally intense. That’s why operations is so important to the fund and why the head of operations is a partner in the firm and not an add-on. It is central to what we do,” Greenig explains.

Testing the markets

To test markets, the fund begins trading in small sizes to assess the liquidity and confirm there is enough liquidity to increase trading sizes. “It’s a process: asking questions, digging into the market, understanding operational issues, setting up small-sized trades, applying it and watching the gauges, making sure the models perform as intended,” he explains.

Greenig has no doubt more alternative markets will continue to pop up. Florin Court aims to be one of the first to trade “anything safely and reasonably tradable”.

The team searches for “sensible ideas”, talking to a wide variety of brokers and exchanges, as well as trawling through academic and industry publications. 

Once a market is added, it is monitored daily. Allocation decisions are looked at quarterly by the investment committee, with the CIO having the final say. The programme avoids performance chasing but, at the same time, is alert to performance that is outside the expected range. 

From the first introduction to CTAs – a completely different experience for Greenig, who had a background in bond arbitrage and relative value – the learning curve was steep and continuous. Looking at CTAs with fresh eyes, he wanted to know when markets really begin trading rather than just bouncing around and what percentage of trades work, why performance changes and many other questions. “AHL was a very interesting experience and deepened my human capital and understanding of the space”.

Florin Court was seeded by Brummer, the prominent Scandinavian alternative asset manager. The partnership with Brummer – a firm Greenig first came to know when he was at Greenwich Capital – has been key to Florin Court’s success in gaining critical mass and attracting prominent institutional investors. The Brummer business model and joint ownership structure is attractive to many hedge fund managers, as it allows them to keep their own characteristics and personality while offering operational support, particularly in trading over-the-counter products. 

When choosing a name for his new firm, Greenig thought back to his first residence in London, Florin Court, an art deco building in Charterhouse Square that was also the residence in the UK TV series of the fictional detective created by Agatha Christie, Hercule Poirot. “It was an interesting place to live. So I chose the building name for the company name.”

Looking to the future of the business, he has not ruled out adding on new products. The core strategy can run up to $2 billion, so there is a way to go before hitting that ceiling, according to Greenig. 

Whatever plans he has for Florin Court for the future, Greenig is keen to ensure the firm keeps its focus on exotics. “There is good interest in alternative markets. They are giving strong performance precisely because there is less efficiency and more opportunity. And these markets make you more global. In fact; the financial world is not just about commodities traded in Chicago or US Treasury bonds. It’s about China, diverse emerging markets,and diverse asset classes. It’s a multipolar world now.”

Despite the Covid-19 pandemic, the upheavals and uncertainty, Greenig is hopeful of continuing with strong performance. At the end of July, the programme was up 30% over the three years of its existence, compared with the SG CTA Index that was flat over the same period. 

July was a particularly good month for the strategy, as it was for most CTAs. “My fingers are crossed for the end of the year. The attitude you have to take, as a systematic manager, is to focus on process, and making your process better. We’ve built a good process. Markets are unpredictable, but you can create quality in every aspect of your process. The results of that commitment to quality show through in time,” he says.

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