Behind the scene Seven Capital Management - Seven Capital Behind the - - PDF document

Seven Capital Management - Seven Capital Behind the scene Regulated by the French Market Authority A.M.F : N° GP 06000045 & the CSSF Member of the NFA

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CAPITAL MANAGEMENT

Seven Capital Behind the scene

Seven Capital Management - Seven Capital Behind the scene Regulated by the French Market Authority A.M.F : N° GP 06000045 & the CSSF Member of the NFA

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Johann Nouveau: “And here we have an example in real time: for example, here we have the S&P, the Nasdaq intraday, and in fact, there is a turning point, it struggles to rise, and then we see a sharp fall. And in fact, we compensate for that, by which I mean that we are long in that market, so we will take a position; but in terms of the Seven Absolute Return, Seven Diversified and Seven Black Snake, in fact we have very long bond positions. And so, what happens to bonds, if we take the US 10-year as an example? The trend is for them to increase in value. So in the end, if we manage to increase

• ur US bond position, even if we are long in US indices, we will make money all the same. So it’s really a case of

balancing the two.” Johann Schwimann: “In fact, the basic process is based on a unique kind of analysis. What we’re interested in is pricing and price changes. Why are we interested in price changes? Because the price is the definitive gauge of the value of a financial asset. Everything is reflected in the price. And what is reflected in the price and determines the price? Three main categories of factors. One: fundamental analysis. That means macro, micro, whether a company is strong, whether it’s in a growth sector, whether changes in the major macroeconomic equilibrium will make the markets rise or fall... That’s fundamental analysis. Secondly: forecasts. The very existence of a financial market depends on forecasts. What I mean by that is that today you might buy a security for EUR 100 because you think, based on your analysis, that the security will go up to EUR 120 or EUR 150. So it’s all about forecasts. The third point is psychology. In terms of psychology, when we trade on markets that are completely crazy and starting to trend lower, all logic goes out of the

• window. Personally, I’ve seen companies that, at the start of 2009, were valued on paper based on their stock market

valuations at 10 billion. The company treasurer I was speaking with said, ‘I have 9 billion in cash, so that means that my global group – the goodwill of my global group – is valued at 1 billion!’ It’s nonsense.” Except that the company had a stock market valuation of 10 billion. Cash of 9 billion and 1 billion of goodwill – it makes no sense. It just shows that you can’t put a price on psychology. But coming back to these three categories, everyone has their own stance when it comes to macro analysis. I hear people who think the dollar will rise, others who think it will fall; some think markets will rise and others think they will fall – in the end, there is no definitive answer. Secondly, the same goes for forecasts: everyone reaches their own conclusion. And it’s completely impossible to put a price on psychology. But if you take these three fundamentals that shape pricing, put them in a test tube and extract the essence, the definitive gauge of the price of the asset is its share price. Because the share price is the price at which you can buy and sell. The share can be traded at that price. So this makes it the truth in an absolute sense. Instead of trying to understand what shapes pricing, what we do, in fact, is try to understand price evolution: is the price movement more bullish or more bearish? And so it’s all about analysing the momentum, based on prices or based on risk data. That’s exactly what we do; it’s at the heart of

• ur technology: analysing momentum through prices. If an asset increases in value, our algorithms will say, ‘The market

is rising, or that share is rising, or that specific market is rising,’ so we’ll take a long position. Or otherwise, the momentum is negative, so we’ll either take a short position (if we can take a short position in Seven Absolute Return, for example, which is a long-short UCITS) or we’ll take a position that is purely long or flat. That means that we will benefit if the market rises, and if the market falls or collapses, the fund is not committed on that market so we are able, in terms

• f traditional management and the fundamental requirements of our core portfolio, to ensure the fund’s flexibility. The

key word is flexibility. This means whether or not the fund manager is able to be in or out of a market – in when the market rises and out of the market when it is collapsing.” Johann Nouveau: “It’s true of any transaction, in fact. Be it a financial transaction, or buying an apartment – any level of

• transaction. Transactions have four possible outcomes: either you make a large loss or a small loss, or you make a small

gain or a large gain. That’s the reality. What we want to avoid is large losses. What do we do to avoid large losses? We limit ourselves to small losses. What do we do to limit ourselves to small losses? If we take a position and the market is not on our side, we acknowledge that we may be wrong. We don’t fight the market. We don’t say, ‘Hang on, the market is doing this, but we’re smarter, the market is wrong.’ No. We cut our losses, we say ‘OK, we were wrong,’ we close our position and there are no large losses. It’s over. So the options left to us are: small loss, small gain, large gain. On the

• ther hand, if we take profits too quickly, we miss out on large gains. We make small losses and small gains – after a bit
• f friction in terms of execution and brokerage, our losses are zero. How do we secure large gains? What we do is, when

the market is on our side, we hold on to our position. And we will protect ourselves, meaning that we will raise our level

• f protection or hedging to stay in step with the market. Then, if the market changes tack, we take profits and we will

have made our large gain. So that’s the difference. Often, in fact, people tend to focus on the point of entry. The point of entry is one element among a whole host of necessary elements. What is important is the entry point, the exit point if

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things go badly, the exit point if things go well and the size of the position. And that’s why we, and our history, may seem more difficult to parse than that of those who truly focus on companies, what they’re doing, what the markets are doing, their plans for the future, their strategies, etc. It’s true that we’re not interested in that – we’re traders and we trade based on pricing. Personally, I sometimes speak with equity fund managers and they say to me, ‘I’m going to buy that company for such and such a reason.’ I have complete faith in their opinion – I have no idea, it’s not my field of expertise at all. The person says, ‘Well, now, I think it’s the right time to buy because the prices aren’t bad and I really like the company.’ Already in terms of the timing of the entry, why enter on that day and not a day later, two days later

• r a week later? It’s a bit vague. Then, secondly, you say, ‘OK, so what percentage of your portfolio are you investing in

this share?’ They say, ‘Oh, I’m convinced, I’m going to invest 5%’, to which I reply, ‘What do you invest when you’re unconvinced?’ ‘Erm, 3%.’ ‘What’s the difference between being convinced or unconvinced?’ ‘I more or less feel it.’ We’ve already entered the realm of subjectivity – it’s not remotely objective. And the third point is this: you say, ‘What made you decide to enter the market?’ ‘Well, I believe in fundamentals and it wasn’t expensive.’ ‘Oh, OK. And if it falls 20% and the fundamentals don’t change, and it’s even less expensive, what will you do? Increase your position?’ So that’s more or less it: I’m all in favour of the approach where you say, ‘This company is good.’ It tells a story from a marketing point of view, it’s extraordinary, it tells a story. But beyond all this, what do you do when things are going well? When they’re going badly, how much do you invest? It’s not clear-cut. What we wanted to do was introduce clarity, meaning that for every transaction we enter into, we know when we will enter, when we will exit and how much we will invest. For us, the key point is that we were inspired by the great macro and historical CTA traders. People like Paul Tudor Jones, George Soros and Stanley Druckenmiller. They were people who may have had macro ideas, just as we may have an idea regarding a company, but who acted with surgical precision. They knew when they would enter and when they would exit. As an example, let’s consider what happened with the pound sterling: in fact, it was simple, by which I mean that a macro deal had been done, they had seen that the Brits had no choice but to devalue the currency. Their fund was up 15% year-to-date, so they said to each other, Stanley Druckenmiller said, ‘Look, I’m going to short the pound sterling.’ And Soros said, ‘Why?’ Druckenmiller explained everything and he said, ‘Yeah, that’s pretty clever.’ And afterwards he said, ‘How much did you short it by?’ ‘I shorted it by such and such an amount.’ And Soros said, ‘That’s way too little.’ So what they did was, since they were up 15% year-to-date, they had their entry point and their exit point if it didn’t work

• ut and they said to themselves, in terms of size, we’re risking 15% of our portfolio. And they increased the positions.

And it turned out that the scenario was borne out; they took profits and they made several billion. But, again, they acted with surgical precision: the entry point, the exit point and the size were all defined in advance. We already carry out backtesting, but in fact the key to these strategies is that they remove any element of subjectivity. It’s objective, it’s tested against the past, and we strip away all of the emotions that can be detrimental to the trader: greed, fear,

• euphoria. All of that is stripped away, it’s over, everything is planned out. But, to reiterate, it’s not a black box. For us,

everything is mapped out because we have monitored the markets, drawn conclusions accordingly and built a portfolio using very precise investment rules that we always apply. If you like, it’s as though we’re in a casino, but we look at it from the perspective of the house. We know that we’ll lose from time to time because some people will win, but we also know that, in the long run, we have a slight advantage that means that we will collect winnings, collect winnings, collect winnings and make money. So that’s what we want to do, and the house in a casino has a very clear-cut stance. There are rules that mean that it knows it will win. We want to position ourselves on the side of the house rather than that of the gambler. Johann Schwimann: “And the important thing is to develop a core driver that truly works on the basis of momentum. We also made a small innovation in that momentum for us is not purely based on pricing – we also measure momentum based on risk analyses, VAR calculations and similar markers, we have momentum calculations based on macro data,

• etc. So we have quite a diversified approach to momentum, but the idea is always the same: trying to track a movement.

We don’t try to go against the movement because, in any case, if you go against something, it doesn’t work; you always have to align yourself with the movement. And a good momentum manager is someone who truly knows how to ride

• ut a market trend. And once we’ve defined this driver, once we’re familiar with it, it acts as a simple signal: I am long at

+1, I’m flat or short at -1. And based on that, in fact, we build a whole framework that we use to create various products and implement momentum solutions in the various sub-funds of the portfolio. For example, our Seven Diversified fund, which I think is currently ranked second in category 3 – the second best performer – is there to stabilise the core

• portfolios. If the markets collapse as they did in 2000, and as they did in 2008, 2011 and 2012, we know that our

technology has never, ever failed. It has always succeeded in taking us out of markets that were going through periods

• f stress. And so, in fact, it’s about striking the balance between a risky market position and a risk-free position. The risk-

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free position may be 3-month, 6-month, French, German – it depends. Latterly we had taken positions on the German money markets because with the stress on the French debt market and the elections, we decided we would prefer to be long in German euro rather than French euro. Maybe it’s a bit ridiculous, but it’s better to play it safe with this sort of

• thing. And the idea behind this product was really to stabilise the core portfolios, because these cores are key. The core

must be stable, and for it to be stable, it must be protected from shocks, because the rest of the portfolio will be built upon this core portfolio. That’s what it means to be a diversified fund. The objective is to generate annualised net returns of between 7% and 9% over a long period. That’s the target in the version we introduced in early 2017. We aim to have maximum drawdown between the high point and the low point of around -10 to -13, -14: that would really be the maximum level of shock we expect to see. Drawdown is essential – it’s very important. In any case, nobody’s ever discovered the magic formula. It doesn’t exist. OK, Madoff is the only person to ever discover it, but in the end it turned out to be pretty costly. So the magic formula does not exist and you have to accept that the net asset value will fall sometimes. On the other hand, it’s simple because it creates more opportunities for investors, when they trust the process, to re-enter higher. And all this is coupled with volatility of between 6 and 7. The aim is to generate between 7% and 9% over a long period, and also for the fund not to experience shocks of -30/-35. If you take a broad overview of diversified management, the 2000-2003 shock led to a fall of -38, that of 2008-2009 to a fall of -35 and that of 2011-2012 to a fall of -30. And it’s crucial that that doesn’t happen. So that’s the case for the core

• portfolios. We will use this driver – this technology, rather – for the essential fund that is this core portfolio. But we may

shift paradigms and work on stocks’ momentum, and that also works extremely well. The other fund – Seven European Equity – which is our PEA, should (within the next two months, I believe) become the best performer in large-cap eurozone equities over a 10-year period in the Morning Star categories. This will mean that it is the large-cap eurozone equity PEA fund with the best track record over the past 10 years in France, Germany, Italy, Spain, Switzerland and the

• UK. It will be the highest-ranked fund across all European countries. So you have a solution for core portfolios with the

diversified fund, and you have a solution for large-cap/eurozone equity, and that’s why we’re not involved in the small, mid or micro-cap sectors – just in eurozone large caps. We can also draw the same conclusion from the more dynamic elements, like Seven Absolute Return, which is now top in your rankings. I think it passed the other 10 yesterday – I was looking at it just now and I think it had already climbed 11% in real time in terms of performance. That enables us to gain a bit of exposure to Absolute Return management, where indicators can be long and short, and offer additional value to the portfolios. We’ve been working in this field for 20 years and in those 20 years we’ve witnessed the evolution of the technology, the emergence of new order-placing systems, the arrival of new platforms... What I mean is that when we started out in this field, there was IBM, there were big floppy disks on both sides and, well, maybe I’m coming across as a bit of a dinosaur, but that’s what it was like. So we really saw the technology evolve...” Johann Nouveau: “Speak for yourself!” Johann Schwimann: “OK, I did!” (Laughter) “And so, given how much the technology has evolved in our field, which is pretty specific at the end of the day, one key factor is knowing how to deal with this sort of thing, getting to grips with it all, understanding what the risks are, the risks linked to placing orders, and all the risks that are fairly inherent in this type of activity.” Johann Nouveau: “In fact, the entire chain is automated, but each stage is checked by a trader. That means that when we trend higher, every stage in the system that tells us what to buy and sell, for what price and in what amount, is checked by a trader. The trader verifies that prices and sizes are consistent, and then this is sent to our broker, who is very familiar with us on the platforms, and this broker also performs a check. Then, additionally, we have a risk controller who monitors all of the orders that are sent: whether the leverage is consistent, whether the allocation is consistent, whether anything is missing. What’s more, this was all programmed years ago, and the bugs have been removed over the years, so now everything works like a well-oiled machine.” Johann Schwimann: “One thing that is essential for us, and it’s something that many ‘fund managers’ (in inverted commas) often forget, is the concept of liquidity. The concept of liquidity is an absolute risk because it’s a hidden risk – it’s a risk that you don’t monitor. And that’s why we only trade full plain vanilla products, which are highly liquid. In terms of equities – and this is why I was talking to you a moment ago about the European Equity fund – we trade eurozone large caps, so all the securities within that particular fund have trading volumes of at least EUR 10 million per

• day. If you select the securities from the Eurostoxx 600 with trading volumes above EUR 10 million, you will be left with

around 150 stocks. That means that there are around 150 securities in our investment universe. That’s the first point. The second point concerns interest rates...”

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Johann Nouveau: “That’s a ‘trick’ we should really focus on. It’s true that liquidity is key – why is it key? Let’s say that everything is going well – you’re investing in stocks that aren’t liquid, but everything’s going well all the same, the market’s rising, you don’t have any problems, everyone’s happy, the portfolio value is up, and everything is going well. But when everything goes wrong, exiting an illiquid stock becomes extremely difficult, or maybe even impossible. And liquidity is key everywhere. Take the Miami real estate market during the subprime crisis: people were buying any old shack and the market kept rising and rising. It was great. But when the downturn came, you couldn’t sell the wreck you had bought. It was priced at a certain level, but you couldn’t sell it. It was priced at a lower level, but you couldn’t sell it. Liquidity is key for us in terms of entry and exit, but also because our funds have daily liquidity, so if there are subscriptions/redemptions we have to be able to adapt to our subscribers’ needs.” Johann Schwimann: “That’s why we don’t trade in small and mid caps, because we never, ever, want to run the risk of a liquidity shock. And that’s also why we only trade futures and government debt in the fixed income component. We work on the US yield curve (i.e. from Fed funds to US Treasuries with up to 30-year maturity); in Europe, we only trade Bund – only German debt in any case, so from Schatz to Bobl – and for Japan we only trade JGB. So we don’t have any corporate bonds, high yield, credit or junk bonds. We don’t have any products where, as Johann was saying, when everything is going well it’s plain sailing and nobody asks any questions, but as soon as something goes wrong... And I think, or rather I hope, that people remember 2007 and especially from April 2007 onward when the credit crunch was taking shape. People had stocks priced at 100 in their portfolios but when they approached the market makers to close positions with volumes of 50 or 100 million, the stocks they had ‘priced’ at 100 in their portfolios could only be sold on the market for 40. Johann Nouveau: “Yes, because the problem with liquidity is that, if a market falls, OK, that happens sometimes, but the problem with liquidity is wanting to exit... Because, at the end of the day, a manager with slightly exotic credit lines or small caps, if the market falls and he doesn’t want to sell he doesn’t have any trouble, but when you are faced with fund management and clients who may be unhappy with the performance because it’s falling and they want to sell, at a certain point you will have to close your positions. And that’s where things can be a bit difficult.” Johann Schwimann: “It’s key for the portfolio and key for the investor because... Well, the challenge for wealth management advisors as regards their end clients, or for private bankers, or insurers, ALMs, family offices, etc. – everyone is facing the same challenge, which is to generate performance and not suffer market shocks. But doing so means identifying which managers are capable of providing stability for the core portfolio. If you know that you’ve ensured stability for that core portfolio, that means that you won’t experience portfolio shocks when there are market shocks, and that your fund managers will have true flexibility, and it means that they can prove to you in light of their track record and the exposure they’ve had that they are really capable of exiting an asset class that is experiencing a shock, because if you look at fund managers who are said to be flexible – diversified and flexible – and you ask what daily exposure they’ve had day by day since inception, and you compare that against market trends, that’s where it really shows! The advantage of our profession is that there is only one judge: track record and prior exposure; and so, if you look at the track record, you’ll see that... In any case, if the market collapses and the track record shows a parallel collapse that means that, overall, there wasn’t sufficient flexibility. The advantage we have is that our momentum models tell us whether or not we should be on a particular market. And as Johann was saying a moment ago, in fact, we strip away all of the human aspects, by which I mean doubts, for example, about whether a market will collapse or when it will bottom out. Back when the market was collapsing, I heard people say, ‘BNP is cheap at 55.’ Yes, it’s true, it’s not expensive, but that didn’t stop BNP from falling to, I think, 15 or 10. So was 55 cheap or expensive? We have no idea. Our advantage is that we can say, ‘We have no idea.’ And based on the principle that we can’t see into the future, and we don’t have a crystal ball, we rely on our algorithms to tell us whether to be in or out of the market. As soon as you have a fund manager who is able to protect the core portfolio from shocks and who is smart, and who also dips into alternative management on the side (alternative management is still a dirty word in France but, in fact, good alternative managers add considerable value in the satellite component), you will be able to build a perfectly stable portfolio.”

• J. Nouveau: “And what’s more, it’s true that... Our approach is not necessarily intuitive and it’s slightly unnatural

because... In fact, we spend all our time being wrong. We lose money, so we’re wrong, in 70% of our transactions, and we may make money in 30-35% of cases. It takes mental strength to say, ‘I’m always wrong.’ How do we make money

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when we’re wrong? Because that’s unnatural too, ‘Those guys make money when they’re always wrong.’ It’s because we have a drastic risk management style. That means that when we lose, we may lose, for example, 1. 70% of the time, we lose 1. And 30% of the time, we make 5. So we make a lot more when we’re right than we lose when we’re wrong. So we can allow ourselves to only be right from time to time, but that takes a drastic risk management style.”

• J. Schwimann: “Risk management is the essential element. It’s the most important thing. Risk management means

knowing, for example, what amount we’re prepared to allocate to a trade. We, for instance, have developed all these

• systems. And it’s this approach in a nutshell, in the Seven Diversified version, which has worked perfectly over the past

10 years because the fund has exactly matched the market over the past 10 years. As we showed you on the graph just now, it mirrored market performance apart from the fact that it didn’t experience any shocks along the way. So that means that risk management is knowing how to manage losses. For us, it’s our systems that tell us that. This means that if the momentum becomes negative, we cut our losses, and then, if the momentum becomes positive, as it did over the last 10 years for the diversified fund, we were unable, I would say, to gain more exposure to the asset classes on the markets that had really strong performance. That’s what we worked on in 2015 and 2016: in 2015, we ensured that our funds were governed under Luxembourg law, we adopted a value approach for all our funds so we could have a little more leverage and, in 2015, we developed and analysed our approaches, new allocation methods, and we must have studied hundreds...”

• J. Nouveau: “As an aside, in relation to what Johann is saying, it’s important to realise that there’s a lot of received

wisdom surrounding leverage. People often wrongly see it as a synonym of risk. That’s true sometimes, but not always. If you only have one asset class then it’s true that leverage means more risk. But when you have a diversified portfolio and you can balance risk across various asset classes, and you need leverage to do so, then leverage can enable you to reduce risk. Furthermore, on that point, you can visit the Seven University section of our website where there is a section, or rather a white paper, on... leverage and how it isn’t a synonym for risk and it can actually reduce risk.”

• J. Schwimann: “Seven Diversified is the core portfolio. Everyone must have one. The diversified part should represent

between 45% and 65% of a portfolio’s assets. It’s crucial to identify which fund managers actually add value. They exist

• n the market and, well, I’m not going to name our competitors but there are some who are, in fact...”
• J. Nouveau: “But it’s true that wealth management advisors, for example, use investment funds to protect investors’

savings from risk and generate stable returns. So it offers stable returns for very little risk. So that means that an investment fund is really a core portfolio. Then, also, to boost the portfolio, because it’s important to give it a boost, you have our Seven European Equity Fund, which is a PEA fund, which has an appealing legal structure and which, after 10 years, is practically at the top of the rankings, and so turning in excellent performance. When the market falls, it falls a little less than the market, but when the market rises, it will outperform the market by far, and therefore offer returns. So a blend of the two is already highly attractive, and you can also combine this with Seven Absolute Return, which is a fund that profits from both market rises and market falls on equities and bonds, which is, at the end of the day, a fund with stable returns and which, even when the equity market crashes, can truly generate huge returns and thus protect, if you want to put it like that, everything else you have in the portfolio.

• J. Schwimann: “It’s really all three... every fund adds value through every sub-fund for every investor. And that really

goes for all types of investor.”

• J. Nouveau: “Of course, Seven Absolute Return (as the name suggests) and the Seven Diversified Fund nevertheless aim

to generate absolute returns. The Seven European Equity Fund aims to generate relative returns higher than those of the equity markets, so that you may have a higher risk level during bearish equity market phases.”

• J. Schwimann: “80% of our assets are held by institutional investors. Leading lights in France have invested with us; we

have a large wealth management advice firm that has been with us since the start that has several tens of millions with us, and we have two or three smaller wealth management advice firms. It’s true that we don’t have a huge presence on the wealth management advice market; we try, from time to time, with a few equities, for example with AXA, and in fact we’ve been involved with the summer schools, and that’s it. But it’s a market on which we’ve yet to make a name for

• urselves, so we need people to get to know us a little better, and find us on platforms; basically, they will normally find

us, but it’s also important that, if they really want the fund, they contact the platform to say, ‘Look, please list this fund. I want it for my clients because it’s now ranked top in its class and I only want to invest in funds that have top rankings.’

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The company currently has EUR 160 million in AUM, spread across several funds; the flagship fund is our diversified fund, which accounts for a little over EUR 80 million. As we have said, a large proportion of our clients are institutional investors, including some of the most prestigious French institutions. So I’ll start, because I’m oldest. Anyway, obviously, our paths crossed at a certain time. I started working at Warburg in 1990 as an interest rate trader, then I went to London to develop Daiwa’s interest rate activities in 1993. After that I was rehired by Warburg in Paris to develop the Paris bank’s prop trading activities, with the Paris desk. So myself, the London prop trading desk and the New York prop trading desk were all working together, so we developed those

• activities. In 1995, Warburg was sold to SBS, and since interest rate activities required a lot of capital, and Warburg was

really all about equity, in fact, they shut down all of its interest rate activities worldwide. So I left Warburg at that point and set up my first management company, which managed what we used to call FCIMT at the time, i.e. future funds. That was in 1996. For the first six years, our fund was ranked among the top three performers worldwide, which is good for a French team; in 2005 I decided to leave, and I created... I left with Johann, who had joined me prior to that at the

• ld company.”

Johann Nouveau: “I started my career in Germany in a bank, where I carried out equity arbitrage. Then I was recruited by Johann at Rivoli, where I worked in trading and research, then I went to Lyxor where I did global macro CTA Forex fund selection. That was quite a rewarding experience because I was able to meet the world’s leading fund managers, see them in their element, and ask them to explain what they were doing, and then Johann and I created Seven Capital as a company in late 2006 and our first funds at the start of 2007.” Johann Schwimann: “Today we are 10 years old, we have a 10-year track record spanning what I would say are the most difficult times the market has ever known, with crashes that almost brought down governments, since in 2011-2012, the situation was so dangerous that... If people were afraid in 2008-2009, they were terrified in 2011-2012. Because the 2011-2012 crisis was quite unusual in that it was a European debt crisis, and so, as a result, states could have fallen. And at that point, we were in a situation – OK, maybe 17 or 18 states have failed in the past, but not with the impact that we would have seen nowadays. Which fund managers were able to survive that period? ...There you have it. We have that 10-year track record, and we’re practically the only fund that hasn’t had any accidents over the last 10 years. We believe that the length of a fund’s track record is key because we often see five-year track records, or even fund analysis over a three-year period, and it just has no meaning whatsoever. The longer a fund’s track record is, in fact, the more we can understand the philosophy and behaviour of that fund, and understand how a fund manager and a fund behaves in difficult times. That’s the first point. Secondly, an important part of what we have done is ensuring that our management style is not dependent on the fund manager. However, for many funds, the individual fund managers make all the difference. Although, in general, investors are not aware of the fact that the fund manager may have changed. We have ensured truly stable management — stable management is essential because we’ve had the same team for the past 10 years, the same algorithms still work, and they’ve proved that they work since there are no shocks in our 10-year track record during periods that were completely crazy. Today, people have somewhat forgotten, but those were utterly crazy times. And we never had any accidents. And that’s why it’s essential to be able to analyse funds over a long period.” Johann Nouveau: “Yes, and it’s true that, just now, I showed you the tests we carried out, that we performed between 1996 and today, so that’s a period of a little over 20 years, but we also have tests because some markets date back to before 1900. You have the Dow Jones, you have certain pre-existing fixed income markets; we’ve also carried out tests

• n periods of over 100 years. It’s true that our approach adds an enormous amount of value over very long periods, but

when you look over the past 100 years, there are periods, plateaus that last two or three years, as Johann was saying, when nothing happens, and we make no money – we underperform. And it’s precisely because we underperform in certain periods that we outperform over long periods. Why is this? Because, if we outperformed all the time, that would mean that there was a formula for success, and there are a lot of highly intelligent people around the world, with a lot of resources for investment, who could discover the formula. But, in fact, there is no formula for success. And that’s why there are times when we underperform. And thanks to that fact, we can outperform, because when you start to underperform, people say, ‘Oh, that strategy is no good, it’s not appealing any more, it doesn’t work any more, it worked in the past, but it doesn’t work now, it’s messed up, we have to move on to something else.’ And so, for us, we know that we’ll have those times that are a bit difficult, and we’ll underperform, but these times will enable us to

• utperform over the long term. Lastly (I’ll hand over to Johann in a moment), our aim is nonetheless very clear, by which

I mean that we now have the team and the technology to become a major player in the field of absolute returns. What

Seven Capital Management - Seven Capital Behind the scene Regulated by the French Market Authority A.M.F : N° GP 06000045 & the CSSF Member of the NFA

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we’re missing now – and it’s a gap in our skillset because Johann and I come from a trading background and we’re not marketing specialists or sales specialists – is spreading the word to people, in a way they understand, about what we do, and why they might want to include it in their portfolio. Once we’ve done that, and made progress in terms of marketing, we hope that our AUM will increase as a result of our performance, and that we’ll be able to grow and become a leading light in the field of absolute returns. In the United States, you have Bridgewater. They’re big but they have fewer funds. In terms of who’s involved, I think that AQR has AUM of over 150 billion, and they really do have a whole range of absolute return funds. They may have Long-Short Equity, Market Neutral, Risk Parity and CTA, so a whole range with one management process. I don’t know what that is, but I think that they must have something that is shared by all the funds, and then they tweak it for each fund, and that’s it. It really sets an example for us – once again, we’re in France, we’re not in the United States; flows are bigger in the US, and things are different, but in France, we believe that there is an opportunity to achieve something, we add value, and so, really, the aim is to grow on that basis.”

• J. Schwimann: “It’s clear that our objective is to raise funds, because raising funds means that you have more financial

resources at your disposal. We would like to recruit 15-20 people and we’ve already identified certain targets who really are extremely specialised in data processing. We need to shift all of our data to Oracle in order to have far greater computing power and testing power. So we have a mountain to climb in terms of IT developments, but for that we need assets and then, once we have assets it’s a given that we’ll be able to recruit people and grow rapidly. But as Johann was saying, it’s clear that we now have one of the best track records in Europe; in the CTA Intelligence rankings, the Absolute Return fund is the leading UCITS worldwide, so that means that France now boasts one of the teams with the best performance worldwide... And so, that’s it, we need investors to say, ‘Well, having EUR 160 million in AUM doesn’t mean that they’re a small company.’ Just the opposite: we were approved by the AMF and the CSSF, we were the first management company granted AIFM approval in 2013, and we are among the three quarters of French management companies approved by the NFS-CFTC, meaning that we have the option of growing on the US market. We now have everything we need to really have very strong growth, and it’s clear that, as Johann was saying, our objective as regards absolute performance is to become a leader in this field. To do that, though, we need investment resources. As a company, we fully embrace entrepreneurship, there are no key shareholders for us, so we manage the company, and that’s also why we have stayed the course for 10 years. We manage this company as if we were the head of the family, so the investments that we make are chosen because we know that we have the resources we need, and we do so in a highly professional manner.”

• J. Nouveau: “Sir John Templeton said that bull markets are born on pessimism. That means that when the market falls,

everyone is very pessimistic, everyone thinks it will continue to fall, whereas, in fact, it could be the start of a bear market, growing out of scepticism, maturing in optimism and dying in euphoria. So, generally, when you have euphoria, the market keeps on rising and we don’t know why any more. I don’t know if that’s the case today, I think we have a bit

• f a margin, but we’re making good progress, and that may be where the danger lies. Above all, it’s funny because

people have different perceptions of risk. At the extremes, when you have a market that is rising sharply, people say, ‘Oh wow, this is great, the market isn’t risky at all.’ And in fact, that’s the blind spot when it comes to risk perception, because the risk is greater. And when the market has really fallen substantially, when there’s been a crash, everyone thinks that it’s all over, the stock market is no more, so the perception of risk is very strong. That’s the interesting stage. So that’s an interesting phrase and then you also have Paul Tudor Jones, who is a trader I like a lot. I don’t know if you know him but he is a legendary US trader; that more or less covers his rules and his trading philosophy.

• J. Schwimann: “We have them on display so as not to forget them.”
• J. Nouveau: “Exactly.”
• J. Schwimann: “That’s it.”