Hedge fund manager Winton Capital making headway with long-only strategy

North American investors are helping Winton Capital Management Ltd. make progress — albeit slowly — toward its founder's goal of becoming a $100 billion company.

The firm's ticket to quadrupling its assets under management is unlikely to be one of its scientifically designed managed futures hedge funds. Rather, it is coming from its more humble, far cheaper long-only global equity strategy.

Winton Capital managed $25.5 billion as of June 30. The vast majority of the assets are in lucrative managed futures hedge funds for investors that include the $130 billion Teacher Retirement System of Texas, Austin; the £15.6 billion ($26.7 billion) Pension Protection Fund, London; and the $23 billion Texas County & District Retirement System, Austin.

By contrast, there are only two North American institutional investors in the Winton Global Equity strategy, but they have pushed the strategy closer to the $1 billion milestone with aggregate investments of $650 million this year. Another $200 million of mostly non-institutional assets from a European wealth management platform also is invested in the strategy.

The $4 billion Colorado Fire & Police Pension Association, Greenwood Village, invested $200 million in the global equity fund in early July, having invested $40 million in Winton Capital's Diversified Futures Fund earlier this year. The other North American investor could not be learned.

Winton's flagship managed futures strategy was launched in 1997, while its long-only global equity approach made its debut in 2009.

Like many hedge fund managers hurt by the financial crisis, “we knew we had to add a few more strings to our bow,” said David W. Harding, Winton Capital's founder, CEO and chairman, in an interview from the company's London headquarters.

Winton's research crew, overweight with Ph.D.s in mathematical and scientific disciplines, set to work fleshing out Mr. Harding's theory that the same expertise in computational analysis and inference they used to develop trend-following trading systems could be applied to global equity markets.

The result was a 130/30 strategy that launched in 2009. But by the autumn of 2010, it had morphed into a long-only global equity strategy that used a trading system similar to that Winton Capital used for its various managed futures hedge funds.

In fact, the equity trading strategy was integrated into the flagship Winton Futures Fund beginning in 2011, reaching a 25% weighting early in 2014, which boosted performance to 9.4% in 2013, compared to 3.9% for the HFRI Macro: Multi-Strategy index. About one-quarter of that return was attributable to the equity strategy, said Robin Eggar, a Winton Capital spokesman.

Mr. Harding has for some years harbored high hopes for the firm's “significant discoveries” in stock selection and portfolio construction.

In a 2011 Pensions & Investments interview, Mr. Harding predicted those discoveries had “enormous commercial value,” noting that success for a long-only strategy requires “a $100 billion fund company” because a strategy that charges fees in basis points “has to be basis points times a big number” (P&I, June 16, 2011).

With a track record that will hit the five-year mark this fall, the Winton Global Equity strategy is attracting attention from institutional investors, said Mr. Eggar, thanks to a combination of meeting performance expectations for the most part — two to four percentage points net of fees over the MSCI World Net Total Return index — and reasonable fees.

The strategy's annualized performance was 13.4% from October 2009 through June 2014. The annualized return for the MSCI World Net TR during that time period was 11.98%.

On a calendar-year basis, performance of the global equity fund topped the index return for two of four full years. For year-to-date through June 30, the fund's 7.8% return was well above the 6.2% of the MSCI World Net Total Return index.

Winton Capital's standard hedge fund fees are a non-negotiable 20% performance fee and a 2% management fee, which may be negotiated down for investors using separate accounts, according to its ADV filing with the U.S. Securities and Exchange Commission.

By contrast, fees for the actively managed long-only Winton Global Equity strategy are either an annual 50-basis-point management fee or 20% of performance above the strategy's benchmark, information from Winton Capital showed.

Mr. Harding said unlike many active equity management approaches, low portfolio turnover and strict attention to transaction costs in the global equity strategy has helped keep fees low and pushed performance higher.

“Two North American investors have had sufficient courage to say to themselves `I accept that these hedge fund blokes are pretty smart, but I hate their high fees. So if I can get this long-only approach with low fees, I will take it,'” Mr. Harding said.

That combination gave “sufficient courage” to the investment team of the Colorado Fire & Police Pension Association to invest $200 million in a separate account version of the Winton Global Equity strategy.

“Like many pension funds, we've struggled with what to do with our passive equity, and while we haven't issued an RFP, we are looking at a variety of strategies,” said Austin Cooley, director-liquid strategies for the Colorado fund.

For example, Mr. Cooley said his investment team is researching approaches that deviate away from cap-weighted processes, such as alternative beta, but added that “(we) are biased toward active approaches at this time.”

The Winton Global Equity strategy which uses a risk-weighted approach and controls turnover and transaction costs, “is a much more efficient strategy,” Mr. Cooley said.

Winton Capital's relentless research means “this strategy is going to evolve along the lines of Winton's core competencies in systematic investment approaches,” said Mr. Cooley adding that his team also appreciates the “alignment of interests” the firm offers by using the equity strategy in its managed futures fund.