26 Apr 2011
The Falcon India Focus Fund, a statistically driven multi-strategy equity long/short product that uses mainly futures and options instruments, has gained 15.3% since inception to March 31, its first year of trading. CapVeda Capital, which offers the fund, launched it in April 2010 with $5 million, but only began actively marketing it in the first quarter of 2011.
Indian entrepreneur Kalpesh Kinariwala, who provided the launch capital, is the CEO of CapVeda. Dharmin Mehta is the managing director and chief operating officer. CapVeda Capital Advisory is based in Mumbai with the Falcon India focus fund domiciled in Mauritius.
The name CapVeda is inspired by the venerable Indian Vedas, which are believed to be the root of mathematics. In sum, CapVeda stands for the capability to apply mathematical techniques to generate alpha.
The fund’s investment process blends: long/short strategy (allocation 60-80%); statistical arbitrage (10-20%); and volatility trading (10-20%). The strategy is systematic in style but CapVeda has traders to ensure that stop-losses and risk parameters are observed. The portfolio managers use statistics to measure deviation, run chart-based technical analysis and do quantitative analysis using equations.
The fund has a strict stop-loss policy of 6% at book level which means the fund liquidates to cash in the event of a 6% book level loss and then waits for the next signal from the system. Risk is managed on four fronts: at the analyst level when a trade is initiated; when the risk manager checks the risk parameters; by dealers when they punch a trade; and at the level of the custodian which has a standing instruction to flag a trade if parameters are not met.
CapVeda is aiming to raise $250 million for the fund. Private wealth groups and family offices in Europe, North America and Asia are the primary marketing focus to get to investors who are interested in India.
The portfolio managers monitor volatility tick by tick and based on that the risk parameters are defined. If volatility (NIFTY VIX) is in the normal average range of 20-24, there is less correlation of the fund with the market. If the volatility is abnormally high such as in May 2010, when it reached 35, every stock becomes correlated to the market. During that month, when many funds lost 10%-plus, Falcon India only fell 5.43% because the stop loss was triggered and the book was squared off into cash.
Kinariwala, an ex-commodity trading advisor, has over eight years experience in global trade execution. Until 2009, Mehta worked for Citi on corporate & business strategy for 12 years. At CapVeda he is responsible for the non-trading functions, including operations, business development, legal and finance.
Indian entrepreneur Kalpesh Kinariwala, who provided the launch capital, is the CEO of CapVeda. Dharmin Mehta is the managing director and chief operating officer. CapVeda Capital Advisory is based in Mumbai with the Falcon India focus fund domiciled in Mauritius.
“This is a pure equity long/short fund,” says Mehta. “Trading is done based on the algorithm we have developed. Algorithms are proprietary, but in general, each model is supported by an underlying economic rationale which drives the returns. These models generate the signals, but it is our portfolio construction and risk management models which help to minimize the potential for unexpectedly large losses.”
The name CapVeda is inspired by the venerable Indian Vedas, which are believed to be the root of mathematics. In sum, CapVeda stands for the capability to apply mathematical techniques to generate alpha.
The fund’s investment process blends: long/short strategy (allocation 60-80%); statistical arbitrage (10-20%); and volatility trading (10-20%). The strategy is systematic in style but CapVeda has traders to ensure that stop-losses and risk parameters are observed. The portfolio managers use statistics to measure deviation, run chart-based technical analysis and do quantitative analysis using equations.
“The portfolio algorithm uses a variety of innovative techniques to forecast the overall portfolio volatility and scales the portfolio appropriately,” says Mehta. “The buy and sell calls are being given by the system with virtually no fund manager discretion. The primary avenue for us to generate alpha is through market volatility and market inefficiencies.”
The fund has a strict stop-loss policy of 6% at book level which means the fund liquidates to cash in the event of a 6% book level loss and then waits for the next signal from the system. Risk is managed on four fronts: at the analyst level when a trade is initiated; when the risk manager checks the risk parameters; by dealers when they punch a trade; and at the level of the custodian which has a standing instruction to flag a trade if parameters are not met.
CapVeda is aiming to raise $250 million for the fund. Private wealth groups and family offices in Europe, North America and Asia are the primary marketing focus to get to investors who are interested in India.
“We are an absolute return fund and not correlated to the market,” says Mehta. “The fund’s objective is to preserve capital and deliver consistent risk-adjusted absolute returns,” he says. India’s attractive secular growth story and high foreign institutional investment in the Indian equities, which exceeded $29 billion in 2010, provide a strong tail wind to performance with the fund targeting annual risk adjusted returns of 15-18%. The fund is run in dollars and is very liquid with monthly redemptions.
The portfolio managers monitor volatility tick by tick and based on that the risk parameters are defined. If volatility (NIFTY VIX) is in the normal average range of 20-24, there is less correlation of the fund with the market. If the volatility is abnormally high such as in May 2010, when it reached 35, every stock becomes correlated to the market. During that month, when many funds lost 10%-plus, Falcon India only fell 5.43% because the stop loss was triggered and the book was squared off into cash.
Kinariwala, an ex-commodity trading advisor, has over eight years experience in global trade execution. Until 2009, Mehta worked for Citi on corporate & business strategy for 12 years. At CapVeda he is responsible for the non-trading functions, including operations, business development, legal and finance.
