January 24, 2013 2:13 am

Numbers game makes Cantab a tour de force

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Ewan Kirk

Earlier this year, visitors to Cantab Capital’s Cambridge headquarters would enter the hedge fund’s main research floor and walk past a racing bike, mounted on the wall. Its former owner? Lance Armstrong.

“I had to buy it off the firm,” says Ewan Kirk, an astrophysicist turned one-time Goldman Sachs partner who founded Cantab in 2007 with Erich Schlaikjer, another Goldman alumni. In its place now is a shining yellow replacement. “It’s Bradley Wiggins’ bike,” says Mr Kirk.

It is a more fitting token. Last year was not just good for British cyclists. Cantab – a little-known hedge fund run from a modest office in a drab Cambridge business park – more than doubled its assets under management.

It currently manages $4.7bn for clients, up from $30m when it launched five years ago. It counts Goldman as an ongoing backer. The bank gave Mr Kirk and Mr Schlaikjer access to the software they developed while there in exchange for a small minority stake.

Cantab is a “trend follower”. Its employees are mathematicians and physicists who develop complex computer codes that automatically spot and ride trends in markets.

It is an approach to investing that explains why Cantab is based close to the university of Cambridge’s deep pool of mathematical and scientific talent, rather than in upmarket Mayfair.

Now, with a new fund poised to open to investors on February 1, Cantab is taking on its established trend-following peers.

Cantab’s new Core Macro fund, which has the capacity to manage up to $25bn, aims to break an industry taboo, by charging fees of less than half those levied by its competitorsMan Group, Winton Capital and BlueTrend.

It has another selling point: while the average trend follower lost 2.6 per cent in 2012, Cantab made 15.3 per cent. Raising money could nevertheless be tricky. After underperforming again last year, hedge funds as an asset class are beginning to slip out of favour. And trend followers are among the least favoured.

Quantitative easing and choppy, politically influenced markets have wrought havoc with most models.

But Cantab differs from other large trend followers in some fundamental respects. While its rivals’ funds have grown in size, Cantab’s existing flagship fund was closed to new investors last year.

Mr Kirk believes that growth in size is inimical to ongoing performance. Investors have also been promised that Cantab will never be a huge company. “We have made a commitment to investors that we have no plans to be bigger than 80 professionals. Culture is not an emergent property, as we would call it in maths. We have to be hyper aware of it.”

Cantab’s offices are collegiate and relaxed. Mr Kirk and Mr Schlaikjer are as likely to make a hiring decision over fish and chips in a local pub (as they did with one of their first partners) as in a sober meeting room.

Perhaps most important, Cantab pays all of its professionals on a fixed profit-share scheme.

“We are an incredibly open firm,” says Mr Kirk.

The same applies to how they brief investors on their performance. For Cantab, crucially, the emphasis is not merely on the size of returns but the quality and risk-adjusted nature of them.

Few and far between are the hedge fund managers, for example, who admit that losses are statistically inevitable. “At some points we will lose money,” says Mr Kirk.

What matters, though, as he emphasises, is doing so for the right reasons (not through a technological error, for example) and performing in the long run.

And, of course, charging fees appropriately.

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