A 'Tiger Cub' Hedge Fund's Experience with Omega Point
SUMMARY
A ‘Tiger Cub’ hedge fund (The Fund) chose the Omega Point platform to better manage factor exposures across its multbillion-dollar investment portfolio. While The Fund had experienced steady growth and consistent performance since its inception as a long/short equity hedge fund two decades prior, it found that institutional allocators were increasingly focused on analyzing sophisticated factor criteria to drive their investment decision-making.
“Since the so-called ‘Factormageddon’ rotation in early 2016, the amount of factor information being requested by potential investors has escalated”.
Following a disappointing yearlong experience using a high-profile competitive platform, the firm selected Omega Point to be able to gain an in-depth view of the factors that are driving portfolio performance and discover how to optimize positions to improve alpha. Omega Point seemed to be the ideal solution, as it was built around the needs and workflows of fundamental managers and it came bundled with Axioma’s premier global factor datasets.
The Fund describes in its own words how Omega Point helps them maintain and grow AUM in today’s challenging capital - raising environment.
Fund Background
“We're a long/short equity hedge fund with multiple-billions in assets under management. In terms of exposures we look more like a mutual fund, as the portfolio is very low risk and longer-term focused. Most of our investors are institutions and include mutual funds, pension funds, and endowments. Our portfolio is comprised of mostly domestic equities but we also will trade futures, forex, options, Rates, CDS, and other asset classes depending on the opportunity.”
"An example of a typical investor is a large endowment with $100 million to invest who looks at each prospective hedge fund as a unique factor-based stock. As they vet our team, track record, strategies and processes, they also scrupulously examine our risk profile. Once the boxes are checked, the investor then considers allocating a portion of their capital to a specific factor strategy and allocate the remainder to factor strategies of other funds that best fit the investor’s overall risk objectives."
“During meetings with allocators and their consultants, we need to help them decide how we slot into their particular allocation strategy. We need to be able to paint that picture in the clearest possible way and answer all of their questions.”
“For example, they may ask about a rotation in our portfolio away from dividend yield into medium-term momentum. Which stocks driving that pattern? Omega Point empowers us to address this line of factor-related inquiries. If you’re too light on factors it can be daunting to be stuck in a meeting with a group of quants and get ripped apart because you don't understand what they're talking about.”
How the Fund Uses Omega Point
The Fund uses Omega Point to help it accomplish the following:
- Identify high-alpha stocks to prioritize our research
- Build portfolios that better isolate our fundamental views
- Rebalance portfolios in step with changing markets
- Hedge unintended exposure with correlated ETFs and custom baskets
- Communicate performance and strategy to consultants, investors, and external stakeholders
Initial Impressions
“We did a pilot trial since we were still stinging from our experience with the previous vendor. It was obvious that Omega Point software was a different product, a better product, and it was going to be easier for us to integrate.”
“The first things that stood out were the front-end visualizations, which were much better than anything we had seen before. The front-end was very well thought out, as it was extraordinarily easy and clear to understand. The fact that Omega Point is web-based was definitely important for us. The other vendor touted their front-end as web based as well, but was actually in WinForms once a web client was launched. It’s easier for them to update, but certainly not an efficient way of going about things on our end. And the icing on the cake was that Omega Point had an extremely powerful API.”
Implementation
“The Omega Point integration was astonishingly easy. With Omega Point we were told that we were up and that was it! All we needed were login credentials and we were set to go.”
Support & Training
“Omega Point provided different training options to learn how to work with the system, but given how intuitive the interface is we didn’t really need much help to get going.”
“Their support has been 100% white glove thus far. Our account rep is incredibly responsive and when we ask to add a particular endpoint, it's usually there the next day. I am blown away by how quickly they act.”
“As an added support resource, I found the online help guides and documentation to be exceptionally comprehensive and deep when questions do arise.”
Investor Reporting
The Fund details how incorporating Omega Point metrics into their reporting process helps them to easily identify and illustrate their performance and strategy to potential investors.
“For example, we can show how much of our return was due to alpha vs. what percentage resulted from factor movements – both style and sector. But more importantly, we can delve deeper into the ‘Why’. In terms of risk, we can show which factors are impacting our portfolio and what we forecast the impact to be based on our own research coupled with indicators generated by the platform. With the Omega Point API it is especially easy for my team to customize the reporting and add rich visualizations to highlight factor-based portfolio characteristics in an intuitive way.”
“We feel we've definitely lost out on new capital in the past by sitting through meetings with very quant-oriented investors when the depth of our explanations was too shallow. Omega Point gives us better answers to investors’ questions and I’m confident this will help raise additional capital.”
API
“We almost never use third party software that doesn’t come with an API. Initially Omega Point’s API was a box to check off during our evaluation, and I don't think we really understood how powerful it was until we started using it.”
“We really like the usability of Omega Point’s API, which is built on GraphQL. Having integrated its capabilities in conjunction with the front-end web client is the equivalent of having thousands of pages of documentation that provide feedback in real-time.”
“Many APIs do a poor job sending back error messages when there’s a problem, but with Omega Point we get detailed feedback and errors. The errors are very specific about the source of the actual problem, which makes it extremely easy to take a diagnostic approach.”
Closing Thoughts
The Fund expects that increasing use of Omega Point will empower them to better manage risk, generate alpha and rebuild portfolios with enhanced risk-adjusted returns.
“For example, we now are using factor baskets along with individual names that exhibit certain factor characteristics to tilt our portfolio a certain way. So if our factor strategy is to avoid dividend yield, we use Omega Point to generate a list of names that would balance out this exposure and then turn those names over to our analyst team to research further. Omega Point is essentially letting factors guide us to what we should be looking at from a fundamental aspect.”
“We’re also getting deeper into predicting what’s on the horizon along with diagnostic actions and prescriptions we can take going forward. Expected normalized return is a huge thing for us and, the Omega point product is very forward looking in that sense.”
