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February 09, 2012 at 08:37 AM
Advisors are always looking for alpha on behalf of their clients, but they’re also–especially since the 2008-2009 crisis–focused more on risk management since at a minimum they don’t want their clients to lose money.
If they’re going to pick managers to run their clients’ money, they also want to know those managers well, and want to make sure that their clients’ investments are liquid. Moreover, if an asset class is not correlated with the overall markets, that’s a significant advantage, too, in building an asset allocation for clients.
At a press conference in New York on Tuesday, the benefits of ’40 Act managed futures mutual funds were on display. Speakers Jon Sundt, Greg Anderson and Dave Kavanagh argued that advisors who allocate some portion of their clients’ portfolios to such funds will generate alpha–especially “crisis alpha,” said Sundt, the CEO of Altegris–while managing risk, all wrapped up in a non-correlating asset class. Since the vehicle for delivering those value-adds is in a mutual fund, advisors can also see what the fund is holding, even if in aggregate.
Sundt (left) defined “crisis alpha” as the ability to generate returns at a time of crisis, and cited 20 years worth of data from his firm’s Altegris 40 index of top commodity trading advisors (CTAs) to prove the point. During the tech wreck of the early 2000s, he said the index was up 40%. It outperformed well during the credit crisis of 2008, and while 2011 was not a good year for managed futures over all, they did perform well during last year’s “summer shock.”
“Investors are hungry for managers who can make money in rising and falling markets,” he said. The Altegris 40 index, he reported, has “better risk-adjusted returns by a long shot over the past 10 years,” though it is important to remember that the “biggest risk” with managed futures is that you can lose money,” so end clients must be carefully educated on their expectations.
The gathering was sponsored by Gemini Fund Services, which, according to Eddie Lund, VP of business development, currently administers some 225 mutual funds, half of them in the alternatives space.
Introducing the three men, Tim Selby, a partner at Alston & Bird in New York, called managed futures “the quintessential hedge funds” for their ability to manage risk, while Anderson (below)
, CIO of Princeton Fund Advisors, said that managed futures belong in every portfolio, but since you can lose money on them, for those clients who can’t accept the downside of managed futures, he said “we allocate managed futures to risk capital.” Being able to go long and short in 150 different markets, Anderson said, make it one of the best tools to manage risk.
Kavanagh (left), founder and CEO of Chicago-based Grant Park Funds, said that “cost becomes an issue in the absence of value,“ and pointed out that while those managers might be expensive, to get those fees in subsequent years, the manager has to get above his high-water mark in returns. He suggested that managed futures should be a “core part” of your portfolio, partly because they are “the quintessential diversifier.” An allocation of 5% to 15% of a client’s portfolio would be prudent he said, especially if that portfolio already includes a “long-term interest in fixed income or equities.”