Rapha, I want you to tell me more about the fund? What is it about? What do you do?
This is a question my Mom used to ask me a lot (Isabelle, this is for you), and so I'll use terms that everybody understands.
Everything that we do comes from the perspective of risk, and obviously, we want to minimize risk. If there is one thing I have learned in finance, it's that there is really no leeway for losing money. If you're in the game of becoming a renowned investor guru like Warren Buffet and George Soros (Nick's mentors by the way), you have to produce results over the course of decades, and never lose money because that would instantly put you out of business.
Ever since Nick started trading, he has been obsessed with preserving capital, because it was both a work instrument and his very own money. So from the start he got interested in the ultimate way to minimize risk in finance: arbitrage. To make a long story short, he developed arbitrage strategies, using statistics and computer algorithms, and was eventually blessed with tremendous results during the subprime mortgage crash and sovereign debt crisis, and more recently when markets were shaken by the surprise election of Trump in November of 2016. These results are even more impressive if you consider that the risk of losing money has always been controlled by a strict minimum: since 2006, his worst year, it has remained flat.
Yes, risk is critical in finance but... how do you make money while minimizing risk?
The fact of the matter is that strategies evolve all the time, as you need to adapt to ever-changing market conditions. Every nine years or so, economists believe a crash is inevitable, and the fact is that you don't trade in a bull market in the same way you would in a bear market. What really matters in the end is the talent your money manager has derived from years of experience. Let me give you an example.
Since the beginning of last year, Nick has been developing a new strategy by analyzing US corporations. The latter are big businesses, be it banks, insurers or other multi-billion dollar companies which are in the business of residential and commercial real estate. Except, he doesn't invest in the companies per se, because that would be too risky for his long term goals of never losing money: company stocks are volatile and vary depending on the sentiment of the market and based on declared quarterly profits. Rather, he invests in the debts of these companies, and not just in any debt.
First, his algorithms detect a particular type of debt. In a perfect world, these debts should have cancelled by the company and replaced by newly reissued and lower yield debt. By not cancelling these high yield debts, the company leaves money on the table, in the form of high dividends. The markets often value these debts as if they were indeed just about to get cancelled, and make them less expensive to invest in. These situations persist, sometimes for years, especially if the cost of reissuing a new debt is high.
Second, his programs continuously capture these high dividends while controlling for other classic market risks. The best part is that if the company eventually decides to stop paying this high yield debt, then capital is still preserved, simply because companies are bound to reimburse investors at 100% of face value.