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How Superfund had 30% returns from Jan-Oct'08?

Published on Wed, Nov 19, 2008 at 10:35 | Source : CNBC-TV18

Updated at Thu, Nov 20, 2008 at 09:47

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Aaron Smith , Managing Director , Superfund

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Aaron Smith, Managing Director of Superfund, the company is a managed futures fund and that they have a diversified portfolio of the futures markets which is about 50% of financial futures and about 50% commodity futures. "So, we are very highly diversified between stock indexes, interest rates and global currencies pairs about half of the portfolio.

The other half of the portfolio is focused on commodities, everything from energy to metals, soft commodities like coffee sugar cocoa, etc., so it's a much diversified futures portfolio," he said.

Here is a verbatim transcript of the exclusive interview with Aaron Smith on CNBC-TV18. Also watch the accompanying video.

Q: Could you explain what this product is all about and how it derives its inverse correlation with the underlying stocks?

A: Superfund is a managed futures fund we have a diversified portfolio of the futures markets which is about 50% of financial futures and about 50% commodity futures. So, we are very highly diversified between stock indexes, interest rates and global currencies pairs about half of the portfolio. The other half of the portfolio is focused on commodities, everything from energy to metals, soft commodities like coffee sugar cocoa, etc., so it's a much diversified futures portfolio. Superfund has an inverse correlationship with the stock market and that may actually be true this year but if one looks at the long run the correlation is nearly zero, so we would say that there is basically no relationship from Superfund relative to the Sensex or the Nifty or any of the major stock indexes.

Q: I am just trying to figure out your 2008 performance because if you were long futures of any commodity or any stock market you would have been down because no market or commodity has been spared but your performance is in the positive so are you short generally on many of these futures?

A: You correctly identified the fact that we are trading long and short. In the futures industry, it is totally normal to take short positions as well. So as a diversified managed futures fund we can benefit from the uptrends in the market as well as the downtrends in the different markets. Thus, in the early part of the year, superfund benefited in having long positions in energies like oil and natural gas. Then in July and August the reversals came in energy markets and other commodities. We started to close some of those positions and then as that actually developed into a downtrend we started to make short positions in various energies and actually profit from that.

At the same time, if one looks at equity indexes using futures contracts we can actually benefit from the downtrend. For the most part in the past year, we have had short positions on various stock indexes not in India but like S&P 500 or FTSE or DAX, etc., we had short positions. But in October we started to close some of those short positions due to the volatility in the market we thought it was actually just safer to take profits.

Q: So just a focus on 50% of financials and equity market indices right now, what's the tactical position you have got going right now, are you just flat for most equity markets or have you started initiating longs on the markets or the indices that you just talked about?

A: We have not initiated long positions in equity markets, we are mostly in cash at this point having taken profits from the October drops and we will wait until there is a clear trend developing. So we would not try to speculate that this is the bottom and we would rather sacrifice the bottom and just start buying stock indexes once a clear rally has taken place and once a clear trend has developed then there will be a higher probability that the trend will continue. Thus, we actually use a systematic approach. In other words we are using technical analysis and trend following to analyze the markets and its important not only to go long and when to go short but also when to just be patient and wait for trends to develop and that's more or less where we are today in the equity markets.

Q: For everything else in terms of asset classes, what are you most comfortable buying right now between crude, base metals or precious metals?

A : The best safe heaven today is gold and we believe that gold can easily breach the USD 1,000 per ounce in the short term, especially, once the US dollar has a correction gold can certainly go to USD 1000 per ounce in the short run sometime next year. But in the long run if we look at say a 2-3 year horizon we believe gold can easily go to USD 1,500 per ounce and even higher from there to as much as USD 2,000 per ounce because if actually gold were to double at price from where it is today it would still be below its all time high adjusted for inflation. So, we think that gold is one of the best places for investors to protect their assets today and unlike any paper currency worldwide, gold has a very solid value which is not increasing because the amount of gold that exists on the planet today is stable and there is about USD 3.5 trillion worth of gold compared with the equity markets worldwide which is about USD 29 trillion. We saw on January 1 the Indian stock market had a market cap of around USD 1.8 trillion and today it is less than USD 0.5 trillion. So, a lot of the assets have come out of the equity markets in India but the average Indian investor probably doesn't even have or doesn't own individual stocks but many Indians own gold and this is one of the reasons why India will emerge out of the financial crisis very strong compared to a lot of the western economies that have borrowed so heavily.

Q: Is your fund a super HNI fund which only a very few HNI's can access or is the ticket size such that even relatively HNI people can invest in it?

A: Let me say that it's a foreign fund so it's a diversification opportunity primarily for NRI's, HNI's or various corporations. The minimum investment for Superfund is only USD 5,000 which is like Rs 2.5 lakh and it is not too high of an entry point but it is under the limited scheme where Indians are allowed to invest upto USD 2 lakh per year overseas. So this is really the opportunity whether one is an HNI or a super HNI or just an average investor, anyone can really benefit from diversification if one takes 5% of their asset and manage to put it in their diversified managed futures strategy to supply growth for his portfolio. Moreover, one should take positions in gold as a capital protection feature then one doesn't have to speculate if rupee or dollar would be strong and actually gold would be the main currency was the main currency world wide in past couple of thousand years and today we think that gold will be continued to be a good store value in future.