Paraclete- The Quest for Persistent Positive Carry in Global Macro Part 2
Paraclete is a Global Macro Fund headquartered in Singapore that deploys a systematic “smart diversification framework” that solves the problem of heightened market volatility by continuously balancing exposures to the right mix of assets that can generate positive expected returns while managing portfolio risk to a constant level. The fund was co-founded by Dennis Mak and Jeff Hu. As of January 2021, Paraclete’s AUM reached $130 million. For the last four years since their founding in 2016, they have had a 26% annualized return, net of fees, making it one of the world’s best performing quant macro strategies. In this follow up interview, we discuss what led to the 2020 performance, advantages of being located in Singapore as they scale their AUM, how Paraclete can benefit an investor holding a 60/40 portfolio, and finally their 2021 investment outlook.
Interview with Dennis Mak, portfolio manager
With the VIX Index hitting its 10 year high at around 83, how did you manage portfolio risk with your dynamic approach to rebalance portfolio positions and prudent risk management contributing to performance of 13.4% for 2020?
Paraclete is an entirely systematic approach to investment selection, portfolio construction and risk management. The strategy is designed to dynamically react to changing market conditions by rebalancing its holdings. By targeting a constant level of volatility, in our case, 30% annualized, our holdings scale up or down depending on the changing risk assessment.
For example, as markets became increasingly volatile leading to the precipitous decline in the markets in March, Paraclete was already reducing its exposures in January and February. As markets normalized from April onwards, Paraclete gradually built up its positions. Getting back in the market allowed Paraclete to participate in the market recovery. Paraclete recovered all of its spring drawdowns and eventually reached a new high watermark by the end of the year.
With excess capital fleeing fixed income, how can Paraclete benefit an investor holding a 60/40 equity bond ratio split? How important is time horizon?
The traditional 60/40 portfolio returned 7.3% in 2020. In comparison, Paraclete returned nearly twice that at 13.4%, net of fees for the Class A share class. Paraclete can benefit the conservative investor’s portfolio. With an initial position size of 5%, with the remaining 95% of the portfolio invested in a 60/40 strategy, the annualized return of this theoretical portfolio would have been 8.1%, with a Sharpe of approximately 0.61. In contrast, investing in a 60/40 portfolio alone over the same time period would have returned 3.4% annualized and a Sharpe of approximately 0.30. The maximum monthly drawdown would have been greater too, at -13.2% versus -12.1% for the combined portfolio. Having a long term time horizon is important to reap the full rewards of a strategy like Paraclete’s because of the power of compounding at high rates of return over time. Paraclete is suitable for an investor with an investment horizon of at least three years and preferably longer.
Why does intentionally being located in Singapore give Paraclete an operational advantage vs. other global financial hubs of: NY, London, and Hong Kong especially as you scale?
Singapore attracts talent across Asia. The region’s top talent are attracted to Singapore’s vibrant mix of Eastern and Western culture, stable social and political environment and advanced knowledge based economy. As a business operating in Singapore we benefit enormously from this internationally competitive talent pool. Singapore also has five highly regarded universities and several more advanced institutes of higher education. Since our work primarily involves academic quality research, our proximity to this pool of research talent is hugely beneficial as our team grows. Our distance from the herd in NYC, London and HK is an advantage giving us space and freedom to think differently from the crowd. A significant edge in investing is behavioral – our environs give us the ability to think differently from conventional wisdom and to operate outside Wall Street’s cycle of greed and fear.
Can you give us a broad overview on your investment outlook for 2021?
A major advantage of the Paraclete strategy is that it does not require economic forecasting or market predictions to feed into the model. As it is often said, predictions tell you more about the forecaster than they do about the future. We don’t subscribe to or promulgate any particular investment outlook for 2021. We know the future will bring inevitable surprises. We are confident we have an investment approach that is capable of handling life’s curve balls, even if they happen to be once in a hundred year occurrences.