Fund manager interview: Gary Norden, NN² Capital

Gary Norden in Australia is a seasoned derivatives trader who has been Head of LIFFE Options at NatWest and Head of Futures & Options Trading at Credit Lyonnais Rouse. As Gary is now launching a hedge fund business, NN² Capital, HFC boss Stefan Nilsson decided to check in with him to find out more.

NN² Capital specifically designs strategies that have close to zero correlation to equities. Can you tell us more about the investment strategy and why it is a bit different from what is already out there?

We started off by designing hedge trades for equity investors that would perform well even on an equity market rally. Over time we realised that the trades we designed have roughly zero correlation to equities in all market conditions and so decided to specialise in this type of strategy. Our trades are not found through just crunching data, they are constructed based on our decades of experience. Therefore, we believe it is hard for other funds to replicate them. So, our aim is to help investors smooth returns and reduce risk. We are not trying to be just an absolute return fund. We currently have half a dozen or so trades in the portfolio but are testing more and have plans to add many more.

You are based in Australia and your co-founder Nam Nguyen is based in Canada. Will you operate the fund with the team split up in two locations? If so, how do make that work practically?

Nam and I have worked together for around five years now so we have our own processes in place. Most financial institutions work across multiple locations so it isn’t a unique problem. We have already begun planning for how we will expand once AUM grows sufficiently and are consulting with an experienced COO in that regard.

You have planned the launch of your fund business over the past couple of years and now plan to launch in the coming months. What has been the hardest thing in getting to launch?

The hardest thing is probably just committing to go through with it. We could have just kept trading for ourselves but we had such a strong belief that we were creating a unique style of trades and fund that we thought we had to give it a go.

As a start-up fund manager, have you felt that service providers have been supportive during the set-up process?

I think all the service providers we contacted were supportive and professional in advising on the areas of their expertise. We were particularly impressed with our fund administrator Vauban and they have helped us across a number of different areas.

This year has been a strange and unpredictable year for most. How has the global pandemic impacted your launch preparations?

Our launch has been delayed primarily due to the pandemic. There were many documents that needed to be sighted and signed by a person of authority such as a Justice of the Peace and for some time, during lockdowns, for example, it was very difficult to get to see those people. Perhaps the hardest thing though has been the inability to travel to meet prospective investors. Online meetings may perhaps work OK for existing funds but for start-ups, meeting people in person is particularly important. We are very much looking forward to Hedge Funds Club events in 2021. It’s a shame we couldn’t go live earlier because our strategies have fared well this year, particularly in March but there are no short cuts to the process so we worked through it as quickly yet as methodically as we could.

In 2020 the macro environment has been hit with many twists and turns, not just because of the pandemic, but also an eventful US election, the ongoing Brexit situation and many other things. Have these events impacted how you as a fund manager look at markets and risks?

We always look at extreme scenarios when we design our trades. As I said earlier, we don’t just design them from backtesting or data crunching. By designing our trades in this way, we know specifically what the P&L drivers are and the main risks to them. We then stress test those risks to ensure we are happy with the P&L profile, drawdowns, etc. Our trades are designed to work in all market conditions and we try to take macro risks out of the equation as much as possible through the way we design the trades. We use very little leverage and also strongly favour long-volatility option style trades to further reduce risk. Between us, we have over 50 years’ experience so navigating through these types of risks and events are definitely important for us but also something we have been doing for a long time. As an example, early this year, around March-April, we saw many correlations tend towards one, i.e. many markets exhibited strongly positive correlations. Many low-correlation funds got hurt. Not only did our strategies show a profit but just as importantly, our correlation to equities remained consistent around zero. We were obviously delighted with this.

The pandemic has caused many investors to rethink allocations and, in some cases, seen them consider new fund managers. Do you think the timing of your launch may create new opportunities for you when it comes to more hedge fund investors looking at you?

We hope so! As I say, we believe we have a unique product but interestingly some funds of funds, for example, have said that it is hard for them to allocate to us because they can’t pigeonhole us in one particular strategy type! We don’t want or intend to become like other funds and will continue to be different though. However, we face the same issue that all new small, start-up funds face in that many larger investors, FoFs, etc will only allocate once we hit $Xmillion but it is hard to hit $Xmillion without a large investor. So, we remain on the lookout for such an investor.

What’s the story behind your company name, NN² Capital?

Finding a name for a hedge fund is so hard, almost everything is taken! NN² is taken from our surnames. We feel that Nam as a PhD/quant and myself as a derivatives trader together represent a more powerful team than the two as individuals, hence Nguyen-Norden squared.