Investing in a mutual fund is relatively simple for all groups, but mainly for the retail public who want access to a wide variety of largely stock-based funds for a minimum investment and hopefully get some upside in a diversified number of markets. Several years ago, the managed futures business worked out a method to provide funds with a derivatives twist.
It confounded the Securities and Exchange Commission at first, and then as the number of these funds grew, it meant comprehensive legislation was needed. When the Jumpstart Our Business Startups (JOBS) Act was passed in 2013, it gave credence to these derivatives-based “’40 Act” funds, and they grew astronomically.
The SEC’s own Division of Economic and Risk Analysis noted that alt strategies funds (defined as including alternative funds, commodity funds and nontraditional bond funds) comprised 3% of the total $17.9 trillion registered mutual fund business in 2015. While the total of registered funds grew by 8% per year between 2010 and 2014, alt strategies fund numbers grew at an annual rate of 17%.
There’s justification for their popularity. With such funds, the retail investor can access the trading prowess of an AQR Capital Management or Campbell & Co. commodity trading advisor (CTA) for a minimum investment and have the usual protections of a mutual fund.
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Just recently, Societe Generale launched the ’40 Act CTA Mutual Fund Index, which is made up of the 10 largest single-manager CTA mutual funds and is calculated daily (See SG CTA Mutual Fund Index at BarclayHedge.com). Through February 19 the index was up 3.82%, while the S&P 500 was down 6.17%.
AQR Capital Management, which has a total of $141 billion under management and offers the largest number of ‘40 Act Mutual Funds, is one of the top funds in the index. Its Managed Futures Strategy Fund (AQMIX) has averaged just over 4% annually over a five-year period. Its HV fund (Class I), launched in 2013, already has $590 million under management, a minimum $5,000 investment and an average annual return of 11%. It has a management fee of 1.45% with no incentive fee.
Cliff Asness, managing and founding principal of AQR, has said they’ve been known as the “fair fee guys” and in some ways have been “rewarded for our virtue” with its incredible growth.
Yet a dark cloud hovers over these funds, as well as leveraged ETF funds, with the SEC’s rule proposal 18f-4, which aims to “provide a more comprehensive approach to the regulation of funds’ use of derivatives.”