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
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