A Talk with Marek Fludzinski, Thales Fund Management
February 25, 2008
Some people have compared playing the stock market to horseracing, which would suggest that being a winner calls for either praying hard and often or studying the stock tables closely. Marek Fludzinski, founder and CEO of Thales Fund Management, said a better idea is to study physics.
"Physics is really about trying to model the world and about when to make approximations," said Fludzinski, who earned a Ph.D. in theoretical physics from Princeton University. "Since trading isn't just driven by physical laws, but also by psychology, modeling to the fourth significant figure isn't relevant, and physicists are good at figuring that out."
With a team of some 40 hotshot researchers and traders, Fludzinski, who initially established the company as Thales Financial Group in 1994 to trade on an exclusive basis for a single client, has been managing some $1.2 billion in assets for domestic and international clients-mostly fund-of-funds operators and institutions-from its office in New York.
"We do quantitative approaches in equity across the board," said Fludzinski, who was director of risk management at Swiss Bank Corp. before he began the Thales venture.
"All of it is market neutral-we don't take bets on whether the market is going up or down. We balance long and short."
What Thales specializes in is statistical arbitrage, and Fludzinski said that over the last seven years, this field has changed (dramatically). The key change, he noted, has been volatility, which has grown (dramatically). As a result-and thanks to enhanced trade execution systems that make ever more rapid trading possible-time scales have been so compressed.
"We find that now there is a lot of opportunity in trading of equities over minutes or hours," he said. "There's also opportunity at the long end-three months or more. But in the middle-a few days to a few months-there is less opportunity."
Many competitors have abandoned the statistical arbitration field, Fludzinski said.
"It used to be that a two- or three-man shop could do pretty well, and there were a lot of them, but now, you need a big research shop and you need to make a significant investment in technology, including maybe 15 years of historical data." he said.
His firm typically adds 150 megabytes of data per day, or 25 gigabytes a month, and has to be able to access all of it quickly.
"To trade at the frequency we're trading, you need a really deep market impact model for each stock, and a rigorous execution system-something that took us years to develop," Fludzinski said. "But our investment has paid off. The opportunities in this area have been increasing."
It All Comes Down to Physics
As an example of how a physics background helps with this kind of investing, Fludzinski talks about that modeling.
"You have to be very careful with modeling not to over-fit," he said. "You can develop a model that fits exactly, but that won't actually predict anything. That's easy to do. Half our work is making sure that we avoid over fitting with our models. The other half is execution."
Additionally, market impact can eat up the whole return on some investments, particularly with smaller companies or less liquid stocks. To capitalize on shorter-term investments and keep market impact as low as possible, Thales has established a fund with a $500 million cap. That fund currently has $300 million in invested capital. If the cap is breached because of growth of the assets, Thales will return profits to keep it under the capacity. Thales Fund Management also runs a second fund, the Temujin Fund, which is described as a long-short hybrid vehicle with integrated "highly automated proprietary screens" and in-depth fundamental analysis. That fund currently has about $900 million in invested assets under management. The goal of the hybrid fund is to make use of Thales high-tech capabilities to handle shorter time scales that have fallen outside the scope of fundamental money managers who lack the ability to handle large amounts of data rapidly, while using the firm's fundamental analysis capabilities to "spurious results" in model simulations.
All Thales software, including statistical processing models, forecasting and optimization code, interfaces to trade execution platforms and proprietary databases were written by Thales staff members.
The current environment in the equities markets is pretty much ideal for Thales, Fludzinski said.
"Changing volatility in a market makes things challenging, but sustained volatility, like we're having now is good for this kind of statistical arbitrage investing. A falling or a rising market provides trading opportunities."
The fund invests in U.S., Europe and Asian equity.
What's In A Name?
Fludzinski named his firm after Thales of Miletus, the world's first known engineer, astronomer and mathematician, and the man credited with both introducing geometry to Greece, and predicting a solar eclipse in 585 BC. Perhaps more relevant to the field of investing, Thales of Miletus is also perhaps the first person to have cornered a commodity market. As reported by none other than the Greek philosopher Aristotle, Thales, who was frequently ridiculed by his neighbors for being perpetually poor, used his knowledge of astronomy to predict a bumper crop of olives for the coming summer. Well ahead of the arrival of spring, he borrowed money and leased all the available olive presses in his region at a favorable rate, and, with his lock on the market, was able to lease them out at high rates later when the demand for them hit.
Fludzinski said he's not trying to corner any markets, but he thinks that Thales Fund Management's mastery of the statistical arbitrage process, and the firm's heavy investment in personnel and technology, does gives it a leg up on the competition.
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