How would it feel to identify trades no one else you know is looking for?

Our guest is back and this interview is all about carry trades, mean reverting environments, merger arbitrage, volatility arbitrage, tail hedges and how to become the best trader possible. It’s quite likely there is something in this interview which will help propel you forward as a hedge fund manager or in your research of managers.

Welcome back to the second part of our interview with Chief Excutive Officer of Future Value Capital, Roman Lutz.

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In This Episode, You’ll Learn:

• Simple Models used by Future Value Capital to implement trend following
• How they utilize carry trades
• The third area of models: Tail Hedges
• Learn about how to carry potentially large value variance swaps while keeping the premium for holding them down
• Where the variance exchange swaps derive from whether from OTC with counterparts or constructed using exchange listed products
• Learn about Credit Support Annex (CSA)
• Risk management procedures at Future Value Capital
• The purpose for tactical asset allocation meetings and the decisions that are made
• The common performance drivers and if there is a dominant part of the portfolio that is responsible for the performance
• How Roman translates the complex trading strategy of Future Value Capital to investors
• How Future Value Capital implements trades and why they consider it a key strength of their program
• How much AUM would be optimal running the program or if the potential is unlimited
• How to create certainty around the risk Future Value Capital holds and how they define that risk
• What Roman Lutz considers to be one of the riskiest thing that could happen in the financial system
• What to expect in terms of returns and drawdown when investing in Future Value Capital
• How to realize when a model is no longer working
• Personal habits that contribute to Roman’s success in managing a hedge fund

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Niels

That's fine. I'd actually be interested in hearing from you how you do trend following, what, in just broad speak, how do you implement it?

Roman

We use very simple models, so typically moving average crosses. We use a combination of a short model with a longer term model. Typically the longer term model is the dominant model, because we want to minimize transaction costs. We don't want to trade in and out every day, so we basically want to capture long term trends. it's also different. Our momentum strategies have a different function in the portfolio than they do, for example, with a CTA. CTAs have to generate performance. In our case, it's good if they generate the performance, but if they don't it's not so bad because we have other strategies, especially in a mean reverting or a non-trending environment, which perform well, like merger arbitrage, or volatility arbitrage, or carry.

A carry trade is a mean reverting environment where asset prices are not moving or moving only a very little, that's a perfect environment for a carry trade. So for us momentum is not really a performance driver, so if we don't make money, as long as we don't lose a lot of money, as long as we don't have a large cost of carry, we're quite happy if the strategy just sits there. That's why the long term model is actually the dominant model. The short term model really kicks in when we have a distress signal, then the short term model kicks in and basically speeds up the whole momentum strategy so that we have basically, let's say if there is a tail event and something happens this afternoon, so this gives us then still the option that this momentum model will change very, very quickly and basically give the necessary protection to the rest of the portfolio.

Niels

In a sense that's probably how trend following should be used by most investors. They shouldn't be so concerned about trend followers not making money in the last 2, 3, 4 years even though it can be annoying, but in reality you could argue that their environment, or that their function in the portfolio is to make money when other things get in a crisis mode and therefore, as long as they are making good money on their traditional assets, which they have done, stocks and bonds have done well, the fact that you have a part of your portfolio which in any event, usually is a very small part of trend following strategies that haven't done anything in the last 3, 4 years, you shouldn't be too concerned. So in a sense I think that makes a lot of sense to do it that way. Now just before we leave the trend following part of your portfolio, for this to work, in your context, am I right in saying that those models are predominantly trading financial market and not so much commodities, where you could say that particular profile maybe doesn't fit because you can't really associate a big move in commodities to anything to do with changes in volatility structure, or anything like that in traditional assets?

Roman

Yeah, we mainly use trend following and interest rates and in currencies. That's basically what we mainly use.

Niels

So we've got a lot of volatility models. We have the trend following models. You mentioned carry...what else happens inside the program?

Roman

I think that probably the third pocket, or the third area of models are our tail hedges. Obviously we have this negatively skewed returns from carry, from merger arbitrage, and from volatility arbitrage. We have these momentum models. But even if we have a very quick model, let's say if there is an overnight event, like a gap situation, tomorrow we come to the office and equity markets are down 20%. If the market is closed, or if you don't have any liquidity overnight, even a very fast momentum model probably doesn't give you enough protection. That's why in our point of view it is important to have some tail hedges in the portfolio. Here we are basically long, forward starting variance, so we are again dealing with the variance swaps.

So we are long 6 month variance swap and short 3 months variance swaps. Basically what this leaves us with is that long vega position that means if markets collapse overnight, these positions should generate a very positive panel. The disadvantage is to hold these positions you have a cost of carry, so every day you pay a premia, like an insurance premium. The key thing is to have enough capital in the strategy that gives you a nice protection when such a tail event happens, but at the same time you want to minimize the cost of carries. You don't want to spend every year 5% in premiums for protection you don't need. That's the difficult part in putting these tail hedge strategies together.

Niels

These variance swaps that you mention, are they off exchange? Are they OTC swaps that you do with counterparts, or do you construct them using exchange listed products?

Roman

Initially we use listed options to do it, but because we felt we didn't want to have too much investment backing exposure, but we basically changed our view. We trade now variance swaps with several investment banks mainly for transaction costs reasons, transaction costs are much, much lower if you trade it with a counterparty rather than doing it yourself, and even though it is an OTC contract, it is an extremely liquid OTC contract. If even 1 bank would default or the trading desk wouldn't be able to show you a trading price, there's a very good chance that you can basically weight this contract and trade it with another bank, because these contracts are so standardized, so liquid. Even if this would happen, even if you wouldn't find a trading desk who quotes you a price, you then still can unwind the variance swap basically by replicated systematically using listed options, and just carry both into expiration. You still have this option.

Niels

But, just out of curiosity, because it's not an area that I've come across personally, because obviously I'm from the exchange listed market environment, but when you run things like that, I guess this swap needs to sit somewhere. I can understand that you can trade it with many people, but, at least in the old days, when you did it with currency OTC strategies, you had the hub and spoke, meaning you could trade with a number of banks but there was one central clearer of this transaction that you needed also. Is that the same here that there is someone that you have the counterparty risks somewhere in that equation?

Roman

No, currently these are OTC contract so lateral agreements between and investment bank and the fund who trades it, so it's an OTC contract. You typically have an ISDA contract which has been negotiated, and then the actual deal is an OTC agreement. You typically you have a CSA, a Credit Support Annex, where you define the collateral. So you calculate the market to market of the product, let's say it's a million dollars, and then one counterparty has to basically whoever owes the other counterparty this million has to provide some collateral. So this is agreed on with these credit support annexes. Then obviously you have certain thresholds that if you reach, let's say $100,000 or $500,000, this basically triggers a collateral event.

Niels

Am I right in saying that there has been talk about creating some kind of exchange for these swaps so that they weren't so difficult to monitor for authorities and counterparts and so on, and so forth?

Roman

Yeah, I think there's still discussions to do that, mainly in the credit space because it's a much bigger market. The credit CTS market is huge. I also know that the Eurex was very much involved but, personally, I don't really know where these discussions currently stand, but it's still traded OTC, basically.

Niels

You've got these different models, and they, to a large extent as I understand it, are pretty much in the market for the most part unless you decide to, on a discretionary basis, to turn them off. Is there anything in terms of getting out of a trade? Do you employ a certain level of stop loss, where you say, "yeah, we've reached the limit and we're not going to stay in this position", or how does that work when you run these kind of models?

Roman

Typically every model has its own risk management procedures. Sometimes they are very complex. I described a little bit about what we do with our variance positions, how we split them, how we half the duration, and how we exit the trade when we see that intra-day realized volatility start to increase, so it's probably a more complex model. Sometimes, there's just stop losses, where we just exit a trade. Very, very simple models where we say if we lose with the strategy more than let's say 10%, we unwind the trade. So these are our basic risk system within each strategy, they are very specific, very strategy specific, kind of tailored for each strategy so that's why they're very, very different. Then obviously we have our monthly tactical asset allocation meetings, where we decide what kind of strategies do we put into the portfolio and how we weight them.

Typically we have an equal volatility weighting, or an equal risk weighting, so a strategy with a higher risk has a lower weighting than a strategy with a lower volatility or lower risk, but we employ a tactical overlay because we know realized volatilities are sometimes not a very good indicator for future volatility. It could happen that we, for several reason, maybe because of crowdedness, maybe because of liquidity, maybe a trade becomes extremely illiquid, maybe we come to the conclusion that a certain trade has unnecessary exposure to systematic risk, that we basically decide, OK this is a very bad environment for this strategy and we take it off. That's something we could do. So we can overweight a strategy, so let's say that the volatility weighting gives us a target weighting of 10%, we can overweight that by 20%, so we could move from 10% to 12%, but on the down side we can basically take it away if we feel that is the right way to do it.

Niels

Is there anything that could be said...I don't know whether this is the right term actually to use, but, if you're looking at performance drivers, and you look at your program, and you look at the portfolio as a whole, is there any common performance drivers that you would point at that creates your performance? Also I would be interested in knowing if there is a dominant part of the portfolio that tends to deliver more of the performance of the program, or whether that's more evenly split actually?

Roman

Yeah, it depends really on the markets environments we are in. If we go into a stress environment, then the momentum strategies and the tail hedgers, they should perform extremely well, because you have strong trends, the tail strategies implied volatilities they explode, so you should perform extremely well in these two pockets. Whereas you probably will lose money on merger arbitrage and carry because they have negatively skewed returns. On the other hand, in a mean reverting environment, as we have seen over the last couple of years, you probably lose on the momentum strategies, you pay out, you get always caught on the wrong foot, I would say. You lose on the tail hedge because you pay out the cost of carry, but it's obviously a very, very good environment for carry trades, for volatility arbitrage and merger arbitrage it depends a bit. If there is a mean reverting environment and then not many mergers then you probably don't make much money in this strategy.

Niels

I wanted to ask you a little bit about trade implementation, but before I do so I just want to ask you, this would appear to me at least, like a challenging strategy to explain to investors. I come from a world where we only have to explain one type of trading, and that can be difficult enough, you have to explain 4 or 5 of them and they're pretty technical, how do you see the translation...I guess you could almost refer back to the movie called lost in translation, where you don't necessarily always convey, or it doesn't quite get understood the way you convey it, how do you deal with that side of things?

Roman

Yeah, it is difficult to explain, but I think if somebody is patient and he listens to us and the investor takes his time. There are many investors out there, they actually they're willing to take on this challenge. You can actually have very interesting conversation and basically build the necessary trust which then leads into an investment. So, yeah, you probably need more meetings. You probably need to explain more. By the end of the day what also helps is there are other very successful managers in the markets who have done something similar, and also investment banks, they are very active in this space, so this embrace this alternative Risk premia concept.

Niels

Do people generally when you go out and talk to them, to they generally understand it, would you say?

Roman

Yeah, we clearly profit from the fact that, especially investment banks, they are very active in this space and they basically educate investors. So investors they know what merger arbitrage, they know what a carry trade is, they understand tail hedges, they understand momentum.

Niels

Yeah, breaking it down in the right pieces with the right descriptions clearly helped. Now as I mentioned I wanted to just ask you a little bit about trade implementation. You clearly run a lot of different models, and looking at different things, looking at lots of data, how do you on a day to day basis gather all of this and turn it into actions and trades and how active do you have to be on a day to day basis from a trading point of view.

Roman

I think that the key point here is that you need good technology. If you trade so many strategies across so many asset classes you cannot do this with an Excel spreadsheet anymore. You need to embrace technology. I think that's probably one of our key strategies. I think that we have a very good and very stable trading platform. That's key, I think. The second thing is our models are actually, if you break them down, quite simple, so even though we use like a high frequency trading infrastructure, so we could actually trade or execute many, many trades, but we actually don't. We do probably, maybe 5 o 10 trades per day.

Niels

That's a decent amount, but not enough to get you overly stressed either.

Roman

Yeah, so the operational risks are...if you employ good technology, and you know what you are doing, that your operational risks are actually quite, quite low.

Niels

But you mentioned that from a technology point of view you do need to capture data on a continuous basis. You can't just cut your data at the end of the day, it has to be also running during the day.

Roman

Yeah. So that's maybe a good point. We don't trade a lot but we trade quickly. So if we get a signal we are very quick.

Niels

Does it actually feed straight into the execution, or is there someone, a human being, who needs to approve the trade in-between?

Roman

Currently we approve the trades, but it's just because we built this infrastructure over the last couple of months, but it's our intention that everything is going to be fully automated at some stage.

Niels

How much money can you run in a strategy like this do you think? Is there an optimum level of AUM that you target, and once you get to that you might say, "this is it"?

Roman

There are certain strategies that have capacity constraints - for example merger arbitrage, and volatility arbitrage. With carry trades this is not an issue there, also the momentum strategies you can trade big capacities. The way we trade, I would say we probably could, the way we execute now, we could probably trade or manage about 700 million. That's what we have estimated. Once we have 700 million, we have to make a decision whether we want to continue to grow and change the way we trade, so we probably cannot trade just the whole size in one go, but maybe we have to do the execution of over the whole day. I personally would prefer to have a smaller fund with certain strategies which have maybe a limited capacity and also trade some niche strategies, because there are some interesting trades that we are currently looking at in our research side where we clearly would have capacity limitations, but I personally would prefer to have a high quality risk adjusted return, which is truly uncorrelated to what investors have in their portfolio, rather than running a multi-billion hedge fund.

Niels

And there's nothing wrong with creating a bit of scarcity around your product that can sometimes at least increase the apatite from an investors...they might get scared they will miss the boat if they don't pull the trigger, so that sounds like a good strategy.

Now I want to jump to risk management. It's not that I have, I think we've talked a lot about this already so it's not that I have a lot of question in this area, but one of the things that I'm curious about is how you... well, let's say that your assumption would be that you would want to have equal risk across the different types of models or strategies, but because they are so different, conceptually I find it a little bit difficult to understand how you can achieve this objective and be certain about that you have more or less equal risk in these strategies because some of them we know, as you mentioned, volatility can change rapidly, and that can put a lot of additional risk into the strategy and suddenly the portfolio is not equally balanced, so maybe you can just sort of explain how you go about creating certainty around the risk you have, and also what is risk in your opinion, meaning do you look at it also from how much do we expect the program to lose when things get really tough, and so on and so forth?

Roman

So I think that a good risk management is really not only looking at data, but having regularly, in our case these are monthly meetings, monthly discussions and we really are not only looking at stress tests, like these obvious tools which often use multifactor models and these factors are basically being generated from historical returns, but really having a forward looking view and ask yourself, "what could we miss? What don't we see in our data? And how do we protect our portfolio if such an even happens?" That has to be the right culture in risk management. We have this technical overlay, so generally we equally rate risk, but then for each strategy we basically assess, does this weighting, let's say 10%, does this basically reflect the true risk of the strategy, or do we have to move away from it? Do we have to reduce it from 10% to 5%? In our experience it is very, very difficult to build a model around that, or to build a systematic process around that.

I think financial markets are just too dynamic and I think it's too complex a problem to solve with a model, and it's very important to have these regular meetings and assess whether the weighting the model gives you, either from a realized volatility number, or from a value at risk number, or for some correlation assumptions, this number reflects the true risk of the strategy.

Niels

Let me ask you in a different way. What keeps you awake at night, what is the risk that you worry about in the portfolio?

Roman

Yeah, on one hand these are financial market risks...

Niels

Niels

You know, tail events are also, it's maybe, I don't like to say that, but... tail events are actually great opportunities to make money, even though maybe it's ethically problematic to say that because they create a lot of suffering for people, but ...

Niels

But they happen, and it is an opportunity.

Roman

Yeah, and I think our strategy is pretty much well tailored to capture these sorts of events as long as central banks are there and bail out the whole financial system, as long as you can trade. If I can get out of my credit trade and I'm short, if it becomes very illiquid, and I'm on the right side, it can be still a very, very good trade. The problem is if you cannot trade anymore, and I'm not only talking about OTCs. If we really have a shutdown of the system.If you cannot trade any futures any more. What if you cannot short on the S&P futures anymore, or if you cannot put your money into T-Bill futures because nobody quotes a price any more, what do you do then? So if there really have a meltdown of the financial system.

Niels

That's certainly something that most managers would worry about, if there wasn't an opportunity to trade for sure. It's interesting, and as I said, when I look at your historic tests as well as your live returns it looks pretty stable. So let me ask you another thing, which is something I tend to talk about which is drawdowns. It's kind of beside the point, speaking to you about drawdowns because you don't seem to have that many of them, but what kind of drawdowns would you expect your strategy to have? If someone gave you money today, if things go as you expect, what kind of returns, what kind of drawdowns should they expect to see?

Roman

I think we try to manage the strategy with a target volatility of 7%. Now interest rates are on a very low level. We think a realistic expectation is maybe a sharp of maybe a bit over 1 let's say 1.2. So if rate are on such a low level, if we get somewhere between 8% and 12% that would be a realistic expectation of average return over the long time. I think in drawdowns, I think we said before some of the strategies, they have negatively skewed returns, so there are situations where you lose money.

These momentum strategies, they can kick in too late, because there is a bit of time lag, and you can end up in an awkward situation where you have a half tail event, where you lose money on the traditional risk premias, momentum doesn't really kick in properly, because it's not really a meltdown, it's something in-between, and your tail hedges don't move, and that's actually the worse-case for us. Where you have a semi-meltdown and semi-distressed situation. What I call that you're like, in German we say you end up between the table and the chair, it's not really a stretch, it is something in-between, and that's the most dangerous for us. You can lose 10%. You have to expect to lose 10%, maybe even a bit more.

Niels

Speaking on that, and it's also a little bit of a combined research question and that is something that interestingly enough I received, although I do try to ask it of all of my guests, but it was pointed out to me today from the audience that it's something that they really like to hear more about, and that is how do you realize that one of your models is not working? Is there something that might prompt a yellow, before it might get a red flag - a yellow saying that this doesn't look normal? What would you be looking for when you look at your models and what kind of event or performance of that model would trigger a discontinuation of it? I guess, in a sense, because what you do is somewhat related to fundamentals, then the changes in the fundamentals in the last few years, literally with negative interest rate in certain countries, and stuff like that which we've not really seen before, certainly not in our lifetime. That in itself means that certain strategies, by default could get out of favor, and even to a point where you would say, this strategy, fundamentally doesn't make sense anymore, so how does that work on your side?

Roman

For us all our strategies are based on strong fundamental theories, so we are not in the game of statistical arbitrage, where we just see something in the data and we trade on it. For us it's very key that we observe something in the real world, let's say merger arbitrage, or the spread between implied and realized volatility, or a carry trade, which is very obvious and which can be basically captured. If this is changing, if this economic theory doesn't hold up any more, then we are getting very worried that the model doesn't work. I think that's maybe the key point. On the model side, obviously, if a model continues to generate losses there's a point where you have to say OK, something is wrong, we have to take it out and we have to find out what's wrong with it, but...

Niels

Merger arbitrage is a good example, you mentioned it had a tough time but there's something with that strategy where you kind of override the performance of it and say, "sure, we understand why it lost money. There were hardly any mergers, but now we see more mergers, so we dial up the risk budget again."

Roman

Yes, I think that distinguishes us from probably some of our competitors, where their investment process is more driven by back testing, whereas we have this global macro view which is very important to us. We have spent a lot of time to develop this view and based on that we put the portfolio together.

Niels

There's this balance when it comes to research that investors often want managers to innovate but they don't want them to change. I don't know whether it's too early in your business yet to come across this issue, but how do you plan to balance that for investors, where they are buying your product, they're looking at your returns, they're looking at maybe your back tests and it has a certain configuration, but of course going forward you might change that configuration as we just talked about, how do you balance that? How should... maybe, as a general questions, how should people look at track records, because we all know managers evolve over time and so even the biggest name in this business, what they did 10 years ago is probably not what they do today, so what's the best way for investors to assess a strategy? Should they really ask for a back test of the current configuration to see what it looks like today, and not only look at historic returns, what do you think?

Roman

I think there are two questions. I think what is really important for us is that we have a close dialogue with our key investors, and that we don't just take their money and call them up at the end of the year and tell them this is the performance, but we basically keep them updated on our research process, we meet with them, we explain what we do and that basically, when we add new strategies to the portfolio, or if we remove something, that we inform them and that we explain to them why. I think if you can build a relationship of trust, if you involve your key investors in your decision making, I'm pretty sure they will support you I think. At the end of the day you want to involved the product and you want to deliver high quality returns to them, and I don't think anybody should have a problem with that. I think it is important that the research process is dynamic, because financial markets are dynamic too. They are actually evolving. Financial markets 20 years ago, or 15 years ago looked very different. Even the instruments you can trade today are very different from 15 years ago. So it's very, very important I think that on the research side you move on with the structure of the market. Otherwise, I think, your returns will suffer.

Niels

I want to shift gears on you again, Roman, and talk a little bit about the business side. First of all, I just want from an overall point of view, what do you struggle with today, what's the hardest thing that you do when you start a business like you've started and you're trying to grow it and all the demands that it has on you, what's the hardest thing about what you do?

Roman

I think time is the most difficult thing because it's not only about running the portfolio. What takes a lot of time is all the rest around it, especially regulatory questions. They take a lot of time, and they are very critical because if you make a mistake on the regulatory side or on the compliance side this can destroy your business. But it can be managed. There are a lot of consultants in the market. You have to work together with the right people, or you team up, like us, with a couple of other managers and you share the costs and you can basically hire the right people, so there are solutions to that. It is much more complex than I initially thought to build an asset management company. I don't want to complain. It's a fantastic job.

Niels

But on the other hand, this is what we're trying to do certainly through the podcasts series, and that is to have real stories, real struggles. It's not easy, it's not something that you just do. Clearly there are a lot of managers who don't succeed, not because they're bad, but simply because it's overwhelming to do, as you say, do a lot of different things and do them right because there is very little room for error. There is very little tolerance and patience from investors. It is a tough adventure, endeavor, to embark on. And I applaud you and commend you for taking this step. But it's interesting, and I think it's important to talk about what's difficult about it and learn from it. A lot of people, as I say, listening to our conversation today will be considering should I start my own, or should I not, and what should I do, and so it's important for them to get a fair assessment of the life of a hedge fund manager and what it's like. I appreciate that.

I want to stay in the business area. In terms of investor behavior. Investors have certainly changed in the last few years. It's become harder, I think, to find investors willing to support small managers, newer managers, because they're doing a lot of tick boxing and they don't want to take the risk, so it's easier for them to pick a big name. Have you found anything that has helped you overcome this challenge?

Roman

Yeah. In general I think investors still will love to invest in new strategies. They are generally very interested in new concepts. And I also understand it because it's probably very boring if you can only invest with the top 50 managers. That's my opinion, I'm not sure, but that's what I think, so I think from the outside or maybe a lot of young or new managers they kind of probably thank God they have a tick box mentality. But the problem is that it's just how the market has evolved and the requirements on infrastructure are very high. So even if they would like investing into a new manager and even if they embrace and understand and support the strategy, often they can't because the manager doesn't have the right infrastructure. I think that's the problem, and this is, I think, probably or mostly because also of the changes on the regulatory side. On one had you think it becomes safer to invest, because you have more regulations, but on the other hand, I definitely think it has a negative impact on innovation because probably a lot of people have great ideas, but maybe if they start to talk to some consultants and they start to realize how long it takes to get your firm approved and then how long it takes to get your UCITS fund approved, and then how long it takes to get the first investor on board. Either you are super confident or you are a bit naive. I was the latter.

Niels

There's nothing wrong with that. I think what's interesting about what you say is that all these changes have probably meant that a lot of institutional investment portfolios are much more concentrated. They're probably invested in many more of the same names than they were before because, as we know today, the biggest part, by far of the assets is concentrated with very few names. Although they may feel good about it, and they may feel that they've done their due diligence, and they found some good names with some solid infrastructures, they may not realize that actually there is another risk, especially if a lot of these investors need to exit at the same time that could be another sort of a risk. But that's maybe a subject for another discussion.

I want to move on to one more question in this sector and then we go to the more general and fun part. But I wanted to ask you this, you've obviously been around for a long time. You've met with many people. Had interesting discussions with them, and I'm thinking more here about potential investors, so you probably filled out quite a few due diligence questionnaires on the way, but what is the question that investors are not asking you, that you really thought, or you really think that they should be asking that would be really helpful for them to understand your strategy or hedge fund strategies in general? Is there anything that you can think of that they never ask but they should? The reason I ask that is a lot of what I see is that many people ask the same questions because we know that there are many standardized due diligence questionnaires. AIMA has done a very extensive one that seems to be the standard, and I just worry that when everybody follows the same path they leave something out, so I want to know from you what you think people should be asking you when they meet with you?

Roman

It's a good question. They ask a lot of questions, and sometimes difficult ones. I have to say, especially the experienced investors, they ask actually very, very good questions.

Niels

Maybe you talk about that, maybe you talk about some of the experience you've had where they ask some really good questions and what they were, that you don't see form everyone?

Roman

I actually take much more away from meetings where I get challenged, where you have somebody on the other side of the table who has a lot of experience and challenged you because that makes you think, and then you go back and you talk to your researchers and you try to address that, or improve that. I came across, actually, some very, very good questions and I think the strategy wouldn't be the way it is now without some actually quite challenging meetings, where we had to go back and say, OK they had actually a very good point and maybe we should look into that.

Niels

Do you remember a specific example? I'm just curious do you remember a specific example where a question from investors let you to maybe come up with something new in the portfolio or change something? Was there a particular area that they were concerned about or pointed out that maybe there was some kind of weakness or something that could be improved that you hadn't thought about?

Roman

Yeah, I think I definitely became much more aware of how important momentum...I think initially we were really on this traditional alternative Risk Premia trade. We really thought that...I think try to stay away from momentum, which is also an alternative risk premia, but we kind of underestimated how powerful they are in a tail event, so we haven't appreciated that enough, I think, and that's definitely something we have learned from investors.

Now, the final set of questions. I call it general and fun, so it's not specifically related to your strategy as such, but I wanted to ask you...you mentioned before that you probably were a little bit naive when you started off, in terms of not realizing how hard it would be, and how much effort and time would go into it. So just based on that theme a little bit, is there any key advice you would give to people who are wanting to embark as a new manager in this space? Just a couple of things where you would say definitely do that, or even to the point where you would say, if I were to start today, and I knew what I know today, I would do it this way instead?

Roman

I think the key point is you need a lot of passion. If you don't really believe in what you do, or if you want to do it for money, or for fame, then you really need to have a different motivators, which comes deeper from inside you.

Niels

What's your passion?

Roman

I want to create great products, which fulfill a function in a portfolio.

Niels

Where does that passion come from?

Roman

I don't know.

Niels

You want to make an impact in people's portfolios, I guess?

Roman

(laugh) Yeah, kind of. You need a very strong inner fire, and then the second thing is it just helps you during the difficult times, because the first couple of years are going to be very difficult. The second point is, I think, you have to manage your finances. It's very important because probably it's going to take longer than you think, and it's very, very easy to overspend. Make sure you don't burn out your capital too quickly. Start slow, maybe do the research out from home first, and moving to an office when you're more confident that you will have some revenues, and you do it step by step. Don't employ a huge army of people without having the means to pay them a reasonable salary because this is unsustainable.

Niels

So passion and common sense.

Roman

Yeah, I think passion and common sense and patience. It takes a long time, but overall I think it's very interesting. I think it's very rewarding.

Niels

Did you always want to be an entrepreneur, if I may call you that since you started your own business?

Roman

No, it just happened. It's not that I in kindergarten I already dreamed of having my own business. No, no, it was an evolution.

Niels

Fantastic. Good stuff. What about any personal habits that you might have that you think actually contributes to your success. Is there anything that you do in your day to day life that you think helps you achieve what you achieve?

Roman

Yeah, I think I...I wouldn't say that I'm a perfectionist, but I am very accurate. I'm kind of never satisfied. It can also be a problem sometimes, it's not always good (laugh). Sometimes it slows me down, I could be quicker if I would go maybe for a less perfect solution, but overall it suited me well. I just like to have things in order.

Niels

Well, when you're managing lots of positions and so on and so forth, having things in order is probably a very good trait to have as a person so that helps.

Roman

I annoy people a lot (laugh).

Niels

I'm sure Walter knows you well, and knows not to take it too serious at times then.

Final question, Roman, and I ask this of everyone, and I hope maybe you can think of something and that is, is there any fun fact about yourself that you could share? Something that people who know you might even not know about you, something fun, could be from your past, could be something from your present, could be a hobby you do that people don't realize? I've had many different answers to this questions, but all interesting, is there anything - a fun fact that you can share about yourself?

Roman: Fun...fun...about me...you have to ask my wife. She probably could give you a whole list of funny things that I do...

Niels

Nothing rings a bell right now?

Roman

(laugh) Not really, no.

Niels

No worries, that's fine. Sometimes we have to think a bit about these things, but in any event, before we finish today, where can our listeners best reach out to you and learn more about Future Value Capital?

Roman

The best place is our web site. So www.futurevaluecapital.com, and I think there you will find a lot of interesting information and there's also a phone number, so that you can call us, or send us an email. The email address is also on this website.

Niels

And I will, of course, put all of these details in the show notes on the TOPTRADERSUNPLUGGED.COM website where people can find all of that and find other ways of linking up and following you. So let me say thank you so much, Roman. It's been very educational for me, and it's been a great conversation. I appreciate your openness and willingness to share your insights and it's been an absolute pleasure. I hope that we can connect at a later date and check in on all the great work that you do.

Roman

OK, fantastic, thank you Niels.

Niels

Thank you so much Roman.

Ending

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