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Portfolio > Portfolio Construction

Managing Volatility With Managed Futures

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Ben Warwick took so long to begin to answer our first question about the benefits of managed futures, we wondered if he was multitasking.

“No, I’m not, I’m just trying to come up with a very easy to understand version of a not so easy to understand story,” Warwick said when he finally got started.

So many of the supposedly “non-correlated” asset classes sure were correlated during the economic crisis in 2008 and 2009, leading to investor disappointment and a re-evaluation of their role in the portfolio. However, the managed futures class wasn’t one, performing to expectations and fueling a boom in their use as a hedge against Europe, a possible double-dip and wild market swings that increasingly put the norm in “new normal.”

But they’re a complicated product, which makes Warwick’s thoughtfulness before responding understood (and appreciated).

Warwick is CEO of Quantitative Equity Strategies, a six-person firm based in Highlands Ranch, Colo. It’s a quantitative shop (obviously) specializing in “creating solutions to the vexing problem of access to alternative investments.”

In other words, they’re alternative investment experts. It’s what they know and it’s why people seek them out (although Warwick is quick to note they know traditional investments, as well). 

“In terms of hedging a portfolio, there are obviously a number of ways to do it; for example, portfolio insurance,” he begins professorially. “But managed futures have a number of positive attributes. The main one is a long volatility strategy, meaning it benefits when volatility increases. Market volatility tends to increase when equities don’t do well, which is the reason it can be such an effective hedge.”

Although they don’t perform as well in good markets, a “little bit of return” can be had. The combination of those two attributes, Warwick says, means that managed futures are “a very, very effective diversifier in a portfolio.”

“It’s like having insurance for a portfolio, but you don’t pay for the insurance if you own it over a long period of time. That’s why people are getting the story. And now that we’re making it easier to purchase, it just makes a lot of sense.”

What he means by “making it easier to purchase” is the Aspen Managed Futures Fund, a managed futures mutual fund launched last August,  along with Aspen Partners Ltd., an Atlanta-based money management firm that is the advisor to the fund (hence the name).

“We wanted to come up with a way to give people access to managed futures in a very cost effective manner,” Warwick explains, “one that takes advantage of the liquidity within the futures markets. Previously, managed futures were accessed through limited partnerships; you had the K-1 and it was not convenient.  So not only is it a mutual fund, but it’s an indexed mutual fund, based on the Managed Futures Beta Index (MFBI) that we developed.”

The fund’s cost-effectiveness is one of its differentiators from similar products currently available. The bulk of funds use multi-managers that have access to, and employ, a number of underlying commodity trading advisors, which creates another layer of fees. This isn’t the case with the indexed approach Warwick and QES use.

“If you went with a straighter hedge strategy, buying puts or selling calls, you’d actually lose money as volatility goes down,” he says. “Overall you end up paying for that insurance, for that reduced volatility. With managed futures that’s not necessarily the case. It can benefit during good periods for equities and it really benefits during bad periods for equities. It is a more effective diversifier. And it has a positive expected return.”

So after everything investors have recently experienced and their desperate desire for safe havens, does the story sell itself?

The fund currently has almost $50 million in assets under management and is experiencing inflows of approximately $1 million a day.

“Pretty good flows for the fund,” Warwick adds cheerfully. “There’s so much fear and global uncertainty, about Europe, for example. The question that I hear a lot from clients is, ‘Is everything that’s happened recently just a Band-Aid? Is the system gamed and rigged again, and is there going to be this catastrophic event in the debt markets that puts us right back where we were in 2008?’”

Good questions, and ones that Warwick’s solution can address.

If clients really want to “move the needle,” he recommends managed futures be 5% to 10% of the total portfolio. Anything less, he believes, and the client isn’t really adding to diversification. And it will reduce overall volatility because of its non-correlated nature to other holdings within the portfolio.

“Because you’re lowering your portfolio volatility, if you like a particular sector of the market or an investment, what this allows you to do is expand the amount of exposure into that preferred asset class. It gives you the confidence to do that.” 

When asked about minimums to invest, Warwick says that for what they deliver in a mutual fund format, depending on the platform, it’s “so low it’s not even worth mentioning.” He does note, however, that he uses the strategy himself and is one of its major investors, something that will play well with the “skin in the game” stewardship grades from Morningstar.

“We have a hedge fund replicator that we’re coming out with in January,” Warwick concludes, when asked about next steps for the firm. “You’ll also see our private equity replication strategy in the first quarter, which does just what it says, which is to give people the returns of private equities funds with daily liquidity. Our commitment is to be one of the lowest cost funds available.  We really strive to give people that negative correlation they need during bad periods for equities. Overall, we want to provide new and cutting edge products for people and will continue to do so.”


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