Bringing an all-weather systematic global macro strategy to the Australian market

Nicolas Hernout, Managing Director and Co-Founder of Cartwright Capital Management talked with the Hedge Funds Club’s Stefan Nilsson about the firm, the investment strategy and much more.

Cartwright Capital Management is an Australia-based multi-strategy systematic fund manager founded in 2022 by Troy Hamblion and Nicolas Hernout. Before co-founding Cartwright, Nicolas was a trader at institutions such as Deutsche Bank, Bank of America Merrill Lynch, Rabobank, Dresdner Kleinwort Wasserstein and Credit Agricole.

You manage a systematic macro investment strategy. That is a crowded space. What differentiates you from the pack?

During our research period from 2018 to 2022, we identified a gap in the Australian alternative asset market for an “all-weather” systematic global macro investment strategy, particularly a local offering in the Australian market which currently seems to be more focused on cash equities and real estate. Despite trend-following offering excellent results over the past 40 years, the allocation towards a systematic global macro still remains relatively small within the growth alternative bucket. Our initial introductions to various dealer groups and asset consultants have identified the need for a reliable local offering in this space. Our unique portfolio construction and risk management techniques offer a fund with an absolute return profile, designed to thrive across the four general market regimes of high growth, low growth, high inflation and low inflation. With 60 years of trading experience, we are not purely quant-driven but have effectively automated our trading expertise using quantitative techniques across a diversified futures portfolio. The ability to go short an asset class introduces a defensive capability and our extra exposure to the commodities universe can help provide an inflation hedge to a diversified investment portfolio.

How much do you research and tweak the model behind the investment strategy? Is it constant tweaking as you go?

Research is an ongoing daily task where we identify gaps or “potholes” in the performance of the fund. Once a gap is identified, we begin the process of attempting to fill these gaps in performance by introducing further strategies or strategy enhancements to improve this performance. Any new strategy or strategy tweak will be backtested over our entire 30-year dataset and must show an improvement in the volatility or drawdown of the whole strategy before implementation. If there is no material benefit in reducing volatility or drawdown over our 30-year backtest, we deem the strategy as insufficient to include and continue our research.

You met your business partner Troy Hamblion while you both worked at Deutsche Bank. Tell us about the partnership and why you decided to set up shop together.

We worked together at Deutsche Bank between 2009 and 2018. Troy was ultimately in charge of running the AUD IRS book franchise where he was responsible for managing all of Deutsche Bank AUD interest rate swap risk in the multi-billion-dollar IRS franchise. This involved reducing volatility in the performance of the book by introducing other trades including many futures trades which would help to reduce the overall market risk. This role developed Troy’s experience in running a large portfolio of moving instruments and introducing strategies to reduce risk and still provide a return. My role at DB was more of a proprietary trading role where I could utilise any markets available to generate profitable trades. I generally used carry and trend trading strategies which enhanced my experience in generating absolute returns. We both left Deutsche Bank over 12 months between 2018 and 2019 and migrated outside of Sydney and New South Wales to Queensland north of the border and a small coastal town called Buddina. As we were looking for a solution to manage our own capital over 2018–2022, we used our respective experiences in managing large portfolios of risk with trend following and carry overlays to develop the underlying investment technique we utilise in the CCM Systematic Macro Plus Fund to this day.

You manage a global strategy but do so from Australia. Are there any specific pros and cons to managing a global fund from Australia?

The CCM Systematic Macro Plus Fund is a fully systematic investment fund that uses daily end-of-day data to generate its trading signals. Using mainly futures instruments, the fund receives its data by 10:30 am every day, making the Asian time zone the most beneficial time zone to efficiently implement new trades and reduce potential slippage. This advantage creates the greatest pro to running this style of investment fund. The fund also has a cash equity trend-following strategy that uses the ASX200 and S&P500 cash stocks to help enhance the use of excess cash within the fund. This creates the biggest con to managing a global fund in this region as every S&P500 cash equity position has a stop-loss order that needs to be working in the market at all times. We have found that partnering with a reliable prime broker who has a global trading desk helps to alleviate this workflow as they will execute all overnight stop loss fills.

You run your firm and team from Buddina in Queensland rather than Sydney or Melbourne. What was the thinking behind choosing a coastal suburb with some 4,236 inhabitants rather than a major financial hub?

We left the institutional banking world in Sydney to raise the personal capital needed and give ourselves the breathing room and headspace to embark on our investment management journey. We have both been raised in small humble coastal towns before moving to large cities and made the decision to give our families both lifestyle options as well. By experiencing large city living as well as small coastal town living, they would then be able to make a decision on their preference over the course of their lives. Buddina in the Sunshine Coast of Queensland has a local airport at Maroochydore 10 minutes from Buddina with three operators offering flights to Sydney and Melbourne daily. The international airport in Brisbane is only a one-hour drive away. The Covid crisis along with technological improvements in execution and reconciliation platforms has facilitated the emergence of work-from-home solutions in the investment management community, particularly for systematic funds where limited analyst input is required.

What are the biggest lessons you’ve learnt since embarking on the exciting Cartwright entrepreneurial journey?

Trust and transparency are the true foundations of investment success. The biggest lesson we have learned is that no matter how much money you think you can make via your strategy, your success will be determined by the amount of trust you can earn within the investment community. We have learned that telling our story as well as focusing on a robust governance and process framework is the foundation of a good investment vehicle. Beyond that, just doing what you can say you can do is the only real investment management criterion. The other lesson we have learned is that much of the broader investment community is still wary or even unaware of using futures products as an investment instrument. We believe using futures instruments as an investment tool provides the greatest ability to tailor bespoke investment strategies within a leveraged environment, and it is now our duty to promote this concept.

What do you as a Frenchman in Australia enjoy doing in your spare time when you’re not managing the fund?

I love the incredible quality of life the Sunshine Coast offers. In my spare time, I enjoy surfing, scuba diving, paddleboarding, outdoor exercise and soaking up the sun. With 300 days of sunshine a year, we’re never short of it! Troy is an avid fisherman who enjoys the primal nature of hunting and gathering and preparing a meal for family and friends. Anybody who travels through the Sunshine Coast will be well aware of his world-famous Pearl Perch Fish Tacos. We look forward to hosting you one day!