We formed Geller Capital Management LLC in March 2000 with the intention of offering clients a classic growth strategy and a hedged strategy — but that plan was short lived.
Right after the firm opened, we found ourselves in a
bear market, and performance of the growth strategy suffered. Although the hedged strategy performed well, the approach was based on covered-call writing whose perceived risks undermined the option strategy.
The ensuing years were difficult, and 2003 began with the firm's overhauling its strategies and investment approach. By midyear 2003, we began to introduce a series of new quantitative strategies.
A key aspect of the new strategies was their highly structured and unemotional approach. Stocks were purchased strictly on the numbers through a structured thought process that focused on what made a stock attractive and a good long-term investment.
During that first year, clients invested on a "leap of faith" that probably had much to do with personal relationships we had developed with them over the years. But year two of the new strategies brought a sense of confidence that we had found an investment golden goose, and we began marketing the strategies. By the end of the year, we had raised over half a billion dollars and launched a market-neutral
hedge fund based on a combination of the various strategies GCM had rolled out over the previous two years.
The future looked good for our firm. But without warning, the strategies stopped working, and this threatened the financial health of GCM. From August 2005 through March 2006, GCM's strategies were no longer adding alpha over their respective benchmarks.
However, in April 2006, the strategies collectively began to underperform the market. As the market fell into a correction, the strategies weakened further. We wondered if our quantitative strategies were failing to live up to their short-term track record, because they were inherently flawed, or because market conditions had changed, and the strategies required adjustments.
Clients can live for a time with performance that matches the market; losing money is another matter entirely. As the correction intensified, and the underperformance persisted, it was clear that something had to be done. The market uncertainty that existed in the summer of 2006 due to economic worries, Middle East unrest and high oil prices was perplexing.
To reduce the pressure on our portfolios, we began to raise cash. First, we identified stocks that appeared to have been "broken" and began to sell them aggressively. Then we placed money from those sales in short-term highly rated bonds until the dust cleared. Those steps left us freer to explore a variety of strategy adjustments. Many clients appreciated that we took steps to stop the bleeding and expressed confidence that we would find a new solution.
We began by performing a series of research projects to learn more about what we had accomplished over the previous three years. Our goal was to identify a profile of what winners and losers looked like. We researched the effect of placing early sell orders on positions when they hit a certain level, up or down.
We researched the effect of adding a technically oriented filter to the existing quantitative and fundamentally based investment strategies. All along, we were careful to evaluate the data. We learned a great deal about the strategies and the stocks we selected, and determined that modifications would help results. At that point, our firm developed a structured outline for the new approach.
By mid-August, we determined that the mini
bear market correction was probably over, and funds should be reallocated to the market via the upgraded strategy. A number of factors made this timing decision a difficult one, so we began to assemble lists of stocks that belonged in the new portfolios.
In order to reduce the effect of market risk and potential whipsaws, the desired portfolios were systematically purchased in stages over three months. This had the effect of increasing exposure and limiting the risk of buying all at once at the wrong time. By tracking performance of the invested portion of the portfolio versus indexes, we were able to confirm the success of the approach. With this, our confidence increased, marketing improved, and the health of the firm was no longer in question. In fact, our strategies were noted as top performers in their respective peer groups.
David A. Geller is president and portfolio manager at Geller Capital Management LLC of White Plains, N.Y.
