BULLERO ALPHA STRATEGY

BULLERO ALPHA STRATEGY

August 2013

Overview


We are launching an absolute return PMS product from September 2013



We are different
-

we construct a portfolio with a

blend of


Market neutral alpha generating strategies


Blue chips bought only at distress valuations
–

we believe the market may offer such
opportunities in the run up to the elections


Our source of return is not market timing, or long
-
only investments



We
view stringent risk management as a key driver to sustained performance in
financial
markets



Initial proprietary capital commitment to strategy from Bullero
–

INR 10 million



The team at Bullero Capital has over 45 years of combined experience in the Indian
financial markets


History and vision

Bullero Capital is promoted by the Khandelwal family based out of New Delhi. The
family has a rich history in the financial markets. The original family firm,
Narayandas

Khandelwal & Co was one of the founder members of the Calcutta Stock Exchange.
The group took membership of the National Stock Exchange in 1995 under
Archna

Securities
Pvt

Ltd which extended till 2003. Since then, the shift had focused to
maintaining a proprietary book and expanding exposure to real estate.


We intend on developing our asset management business via the Portfolio
Management license and grow our AUM to about
Rs

100
crore

under the absolute
return strategy gradually


The next step will be setting up of a closed AIF fund to trade across all asset classes
–

equities, currencies, commodities, fixed income
–

with potential for leverage.

Management philosophy


We are a fiduciary to our clients
–

client interests come first, always.



We seek to build relationships that are built on principles of trust, truthfulness and
ethical conduct



We value truth and excellence above all traits
–

we need to know



We believe that the economy and markets are continuously changing.



We pride ourselves on being able to nimbly trade the markets, and
strive to deliver
superior risk
-
adjusted returns to our clients



Our attempt to deliver superior returns necessitates consistent, focused research to
improve our methods, generate new ideas and work to identify regime changes in
the markets and the economy








Organization chart

Tarun

Khandelwal

Chairman

Varun

Khandelwal

Chief Investment Officer

Sanchit

Mehdiratta

Analyst

Shivani

Lal

Analyst

Sachin

Compliance / Accounts

Back
-
office
Personnel

Archna

Khandelwal

Marketing / Strategy

Rabia

Sooch

Marketing / Strategy

Investment team

Varun Khandelwal

is the principal
officer at Bullero Capital
. He has been responsible
for managing the proprietary desk spanning equities, fixed income, real estate and
options at Bullero since 2010.
Bullero’s

proprietary desk holds investment stocks and
runs algorithmic strategies, statistical arbitrage and volatility trades expressed via
options. He has extensively
applied his expertise in statistically tested strategies to
enhance investment
returns.


Prior to joining Bullero, Varun worked
at
Oxus Investments under
Surjit

Bhalla

from
2007 to 2010,
starting as a research associate and quickly progressing to
portfolio
manager. He helped develop
investment strategies, portfolio analytics framework and
generating investment ideas for the portfolio
.


Varun
served as a Visiting Faculty in Finance
at Birla
Institute of Management
Technology

from
2011
-
2012.
He
was on the editorial board of Developing Trends,
an
institutional
macro publication on
India. He
holds a MSc Economics
from
the University
of Warwick
, UK
and a BA (
Hons
) Economics from Delhi University.

Investment team

Tarun

Khandelwal

has over 35 years of experience in the financial services industry
as a broker, proprietary trader and investment manager. He specializes in applying the
combination of fundamental analysis and technical analysis to markets.
Tarun

has
extensive experience in
broking, investing
and
trading. He has
a deep knowledge of
financial
markets, promoter groups, political alliances
, government policies, business
models and corporate governance in India.


Tarun

has been running a proprietary trading operation since 2003 till date. Prior to
that, he was running
Archna

Securities
Pvt

Ltd, an NSE broker since 1995.
Tarun

founded
Archna

Securities
Pvt

Ltd in 1992 in Kolkata. Before founding
Archna

Securities, he worked in the family firm
–

Narayan Das Khandelwal & Co
–

a founding
member of the Calcutta Stock
Exchage
. He has seen Indian markets develop from their
incipient stages of the outcry system.


Investment
team

Sanchit

Mehdiratta

started his career at Bullero over three years ago as an analyst.
Sanchit

specializes in developing mathematical trading models, statistical testing of
trading trading strategies, implementing algorithmic trading solutions and risk
management.


His responsibilities include implementation of portfolio strategies, monitoring portfolio
risk, and the upkeep of our financial databases. He has a degree in Mathematics from
Hans Raj College, University of Delhi.


Shivani

Lal

has over four years of experience in the financial markets. She started her
career with Bullero in 2009 as an analyst and trader. Her responsibilities include trade
execution, risk reporting and independent implementation and monitoring of risk limits.
She has a degree in Commerce from the University of Delhi.

Investment philosophy


We invest in

blue chip

companies trading
at
cheap valuations

offered by market
declines



These investment candidates are
estimated within the context of the
domestic and global

macroeconomic
factors



We apply
technical analysis

to define
entry/exit points from our investment
stocks



Blue chip stocks have

stop losses
as well;
we believe things can go wrong in any
segment of the market.


We believe that
innovation

is
essential; we
apply the latest
investment research
and build
proprietary models that are
differentiated from street research



We take a
disciplined
, quantitative
approach to finding opportunity,
capturing alpha, managing risk and
assessing performance



The
ability to monitor

statistical
index/stock/sector relationships in
real
-
time provides us with
a deeper
understanding and provides unique
trading opportunities


Qualitative

Quantitative

Investment strategies

Multifactor models

•
Constructs a portfolio of market
neutral positions from the FNO
space based on value, growth,
reversion and momentum
alphas

Pairs Trading

•
Basis

–
stocks have statistical equilibrium relationships

•
Trigger

–
stocks diverge to a statistically significant
extent

•
Profit
–

achieved when stocks converge to equilibrium

Quasi
-
arbitrage opportunities

•
Between different classes of shares with the
same underlying

•
Example
–

Tata Steel EQ and CCPS, Tata
Motors and DVR

Open offers


De
-
listings


Merger Arbitrage

Blue Chips

Investment process

Step 1:
Macroeconomics

Analysis of global
economic
situation and
capital flows

Top down view of
risk factors,
political cycles,
policy measures

Interest rates,
exchange rates
and other macro
variables

Step 2:
Opportunities
Identified

Proprietary
Quantitative
Models

Arbitrage
Opportunities/
Special Situations

Investment
opportunity in blue
chips at cheap
valuations

Step 3: Portfolio
level analysis

Opportunities
evaluated in the
context of the
overall portfolio

Liquidity and
market structure
related checks

Correlation check
of trading idea
with existing
exposures

Step 4:

Risk Monitoring
and Limits

Risk limits and
parameters
validated

Positions sized
depending on
volatility

Positions
monitored for
profit
-
booking /
stop
-
losses

Investment
process

Our edge is in our research driven investment process


Before establishing any positions, the team evaluates a variety of factors not easily
captured by traditional valuation models


Global business and credit cycles


Liquidity cycle


Market technicals


Political dynamics


Likely economic policy path



As a policy, we do not take positions contrary to dominant macroeconomic themes;
we are not a bottoms’ up fund



The portfolio is a product of ongoing research and risk assessment



Example
–

pairs trading


Pairs trading helps generate returns uncorrelated with equity market performance;
they are a useful instrument for diversification of portfolio risk



We monitor over 1000 intra
-
sector and inter
-
sector pairs across different instruments
on a daily basis using our quantitative models



Our models are proprietary
–

we do not use the
bollinger

bang/standard
deviation/correction methods commonly used by the sell side



Pairs trading is usually avoided during earnings season and during periods of market
stress




Example
–

pair trading

Exit Date

Profit (%)

Duration

Long

Short

27
-
May
-
10

6

7

ACC

Ambuja

16
-
Aug
-
10

3.9

16

Ambuja

ACC

04
-
Oct
-
10

4.9

7

ACC

Ambuja

25
-
Nov
-
10

6.7

11

ACC

Ambuja

27
-
Dec
-
10

1.3

9

Ambuja

ACC

28
-
Jan
-
11

4.4

12

Ambuja

ACC

18
-
Feb
-
11

2

12

Ambuja

ACC

12
-
May
-
11

1.3

27

ACC

Ambuja

25
-
Jul
-
11

1

10

Ambuja

ACC

13
-
Oct
-
11

2

2

Ambuja

ACC

02
-
Dec
-
11

2.7

3

Ambuja

ACC

24
-
Feb
-
12

-
0.1

10

Ambuja

ACC

23
-
Apr
-
12

2.3

1

ACC

Ambuja

17
-
May
-
12

3

11

Ambuja

ACC

02
-
Jul
-
12

-
3.6

21

ACC

Ambuja

05
-
Sep
-
12

0.4

26

ACC

Ambuja

19
-
Nov
-
12

1.2

30

ACC

Ambuja

15
-
Jan
-
13

1.9

1

Ambuja

ACC

08
-
Feb
-
13

5.3

7

ACC

Ambuja

25
-
Mar
-
13

4

13

ACC

Ambuja

14
-
Jun
-
13

1.9

3

Ambuja

ACC

25
-
Jul
-
13

11.2

23

ACC

Ambuja

06
-
Aug
-
13

3.6

7

Ambuja

ACC

Example
–

quasi arbitrage


TATA Steel / Corus merger resulted
in the issue of convertible shares that
traded at a discount of about 16% to
18% to the TATA Steel shares; a
riskless arbitrage trade involved
buying the CCPS and shorting the
TATA Steel futures




Such opportunities present
themselves intermittently, and when
structured properly, offer fantastic
risk/reward trades for the patient
investor



In the present market, Tata Motors /
DVR offer a similar opportunity with
an added element of risk
–

there is
no conversion. The relationship can
be statistically modeled and traded
for superior
-
risk adjust returns



These trades present us
opportunities to diversify risk and
reduce portfolio/market correlation

Risk management

We believe that without a strictly defined risk management system, even the best
investment strategies may fail to deliver acceptable returns


Risk management is the first step in the integrated investment process. It is a
proactive, ex
-
ante approach to identify, quantify, and manage risks



Risk identification: No trade is executed without thorough analysis of all sources
of market and instrument
-
specific risks



Risk measurement: Our quantitative, proprietary risk management system
measures risk of each new trade/position from a variety of perspectives


Stand
-
alone volatility


Marginal contribution to portfolio volatility
–

low portfolio correlation preferred


Risk concentration in single name/sector



Risk constraints: Portfolio volatility, diversification, beta, single name crash/open
offer

Risk management


Multiple strategies, one book: primary risk management is portfolio
-
wide



Portfolio PNL, directional risk, and stop level are monitored real
-
time.
We have
volatility targets
for our portfolio; if
volatility rises
, we actively reduce exposure till
portfolio volatility is in target
zone



Beta exposure of the portfolio is re
-
estimated regularly via our proprietary
quantitative algorithms; we are very sensitive to shifts in the beta of our exposures



Trading strategies have clearly defined, ex
-
ante, risk budgets. If these are exceed,
the strategy is decommissioned till performance resurfaces



Entire p
ortfolio has strict drawdown limits


7.5%
-

evaluation of source of losses. If temporary, positions held.


10%
-

If same problems persist, we reduce exposure.


15%
-

sharp cut in exposure till drawdowns start recovering

Risk management


Systemic
Risk


We

believe

systemic

risks

continue

to

exist

in

the

global

financial

system,

particularly

in

Europe,

China

and

Japan


We

monitor

the

macro

economic

conditions,

bond

markets,

interbank

money

markets,

and

yield

curves

of

countries

around

the

world

to

stay

alert

to

signs

of

rise

in

stress

in

the

financial

system


Lowering

of

portfolio

exposure

during

periods

of

triggered

systemic

risk

events


Crisis

offers

opportunity

–

only

if

you

have

cash


Maintenance

of

conservative

portfolio

in

extreme

situations

with

extensive

application

of

qualitative

analysis



Operational Risk


Use

of

offsite

systems

for

operational

redundancy



Duplication

of

trading

and

research

systems

on

Amazon

AWS

Cloud



Avail

services

of

high

quality

counterparties

with

strong

financials









Fund structure


While not a SEBI requirement, we have appointed
Kotak

Mahindra Bank as
custodians to the fund


For greater transparency in accounting and handling of client assets


Fund Accounting
–

profit/loss, NAV, reporting, etc.


Client’s Depository and Bank accounts


Allocation of trades by custodian/fund accountant according to pre
-
determined
allocation matrix



We are a pure portfolio management firm
–

only charge management/performance
fees from client



It is not our intention to develop a direct marketing channel; we will market our
products through distribution channels only

Fund structure

Custodian

Kotak

Mahindra Bank

Bullero Capital

Distributor / Broker

Client

Revenue

Accounting

Fund reporting


Kotak

Bank has been appointed as the custodian of assets, and clearing
member in cash/derivative segment



Kotak

Bank is also the fund accountant responsible for maintain client
accounts and performance reports



Client NAV is available on a daily end
-
of
-
day basis from
Kotak



The set
-
up ensures transparency in handling of client assets and reporting

Data infrastructure



Bullero maintains one of the richest possible datasets on Indian financial markets



We analyze in real
-
time market data at the bid/offer level to estimate liquidity
impacts, high frequency trading activity and strength of market moves



In addition to financial data, we have designed news bots to seek out company
specific news from blogs and financial websites



Our back testing platforms are developed in
-
house by us using a combination of R,
Stata
, and C++



Self developed systems enable us to avoid the common pitfalls that plague most
users of commercial software such as over fitted trading models, poor live
performance and restrictions on strategies spanning multiple instruments


Terms and service providers


Minimum investment:


INR 2.5 million


Additional Investments: INR 100,000



Management fee
–

2% up
-
front


Performance fee
–

20% annually


Hurdle Rate
-

none


High watermark
–

Yes


Entry load
–

none


Exit load
-

5% if withdrawn prior to completion of
first year



Custodian Fees
–

20bps per annual


Brokerage
–

industry norms


Custodian:

Kotak

Mahindra Bank



Fund Accountant:

Kotak

Mahindra Bank



Legal Counsel:

Ankur

Sood

& Co



Brokers:

India
Infoline

Limited

Religare

Securities Limited

Fees and Charges

Service Providers

What is true…and clarifications..


What is true?


The strategy is not leveraged as per compliance with SEBI regulations


The strategy may vary net exposure from 0% to 100% depending on
market conditions and
valutions


Strategy uses a combination of quant, fundamental and technical factors



and what needs clarification….


Returns may be negative


This strategy is not a substitute for long
-
term equity investment portfolio



Contact Us



Varun Khandelwal

Managing Director

Bullero Capital
Pvt

Ltd

306 ABW Towers

MG Road, IFFCO
Chowk

Gurgaon 122 002, India


Mobile: 99719 05678

Phone: +91 (124) 411 0803/04/05

Fax: +91 (124) 400 0806

Email:
varun.khandelwal@bullerocapital.com