MF Global Ltd., the futures brokerage that was spun off Man Group, has been building an asset management business. Its brokers are introducing pre-screened commodity trading advisors and global macro managers to clients.
People on both the buy and the sell sides of the investment market are much intrigued by this development. On the investor side, the safety and convenience of a managed account platform is appealing. On the manager side, many are eager to be on the platform so as to meet clients. In view of the extensive interest, we wanted to learn more about the operation.
Adam Rochlin, senior vice president and head of MF Global Alternative Investment Strategies, answered our questions. Mr. Rochlin previously worked for Genworth Financial and spent five years at Oppenheimer Funds, where he headed the $40 billion fixed income product management unit.
The MF Global AIS team includes portfolio manager Mitchell Nathanson, who formerly created hedge fund portfolios and traded global macro strategies at Arctos Capital, and product development chief Russ Rubino, who was responsible for product launches at Genworth Financial.
Opalesque Futures Intelligence: How did this venture start?
Adam Rochlin: In 2007, I was brought in to figure out how to best leverage MF Global’s longstanding relationships with CTAs, our expertise in the futures space and the global reach of our firm, in order to build a managed futures business. Over the past year, Bernie Dan, our chief executive officer, nurtured this new initiative as part of the firm’s goal to diversify revenues. There are a few critical components when you’re building a business for investors. First, you need a clear vision of what type of products you will offer and what type of clients you want to serve. The second stage is to build the team, putting the right people into the right jobs.
OFI: What kind of skills did you look for?
AR: People with a depth of experience in managed futures and global macro and the entrepreneurial spirit to want to build a new business, as well as a track record demonstrating that they can execute against the business plan. What made it possible to build the group was that our CEO embraced the vision of what this business can be and drove resources and organizational commitment to see it through. Without top leadership support in an organization, a new business does not have much of a chance to succeed.
OFI: What’s the next stage?
AR: In the past nine months or so, we’ve been executing the plan. We built architecture for a rigorous manager selection and due diligence process. Given the international operating footprint of MF Global, we have unique access to managers around the world. We operate in 14 countries, have brokerages in Europe, Asia and Australia as well as North America.
OFI: Does that make a difference?
AR: Yes. It’s not just a matter of screening managers in Chicago and New York. Sure, you can send someone on a three-week mission around the world to find good managers. Many firms do that. Our advantage is that we’re already operating as a futures commission merchant in just about any region. This enables us to move quickly with on-site due diligence and keep an eye on managers. It is a significant advantage to feel the rhythm of a local business rather than send people to visit once a year. We have a senior executive, in fact the regional head of risk, sitting in Singapore. He can visit managers if our team in New York can’t get there for the quarterly check. Similarly we have senior executives in other regions, from Australia and Taiwan to France and Switzerland. Our people have been working with traders in an area, know the community and are among the first to get calls from emerging managers who want to set up their own shop.
OFI: Do you see a significant number of managers in Asia?
AR: There is an increasing number of CTAs in Asia, though not as many as in Europe. We’ve met a lot of great managers from Europe. There is a fair number of managers in Australia, which is very exciting.
OFI: How many managers have you looked at?
AR: We have a big pipeline of managers globally coming into due diligence. So far we’ve done quantitative and qualitative due diligence on about 125 managers. Of those, we’ve done on-site visits and third party background checks for 45 managers. Before we put a CTA on the platform and in front of one of our clients, we need to see the manager and have a third party do in-depth background checks. Each manager must have a third-party administrator, auditor or accounting firm to help us validate their performance. Otherwise, we will not move forward with a manager.
OFI: Are you in touch with the people in the geographically far-flung offices?
AR: I speak with our colleagues in other parts of the world at least once a week about what they see going on in their region. One of the topics we discuss is regional investors’ preferences and behavior. We get real time feedback from our associates on the ground to test our ideas and tailor an offering to regional needs.
OFI: Do regional investment tastes vary with respect to managed futures?
AR: It is fascinating to understand global investor patterns. Compared to the US, in Asia and Europe there is much greater interest in futures. In Europe the culture is more open to a technical style of trading, provided it comes with a good explanation and time-tested data. Other differences show up in the types of managers investors want. With relationships in so many countries, we learn what is important for investors in a certain market in terms of managers’ characteristics, in particular range of experience and assets under management. It is not guesswork for us what clients want in, say, Tokyo vs. Hong Kong, because our people on the ground tell us.
OFI: Would you give an example of an international difference?
AR: In certain parts of Asia, people like managers that have at least a couple of billion dollars in assets. By contrast, in the US, seasoned investors want the next great manager—that does not mean emerging managers but those with a three-year track record, proven business model and say between $50 million to $250 million in assets. I can’t tell you how many indications of interest we’re getting from US investors looking for that type of manager. The fun thing for us is to find managers with different experiences and track records to fit investors with different preferences.
OFI: Is there interest from institutional investors?
AR: We’re seeing more interest from family offices, consultants and pensions than we’ve seen before, and a lot of interest from ultra-high-net-worth clients. Investors are now showing a greater sense of urgency about getting into managed futures and global macro.
OFI: What about the retail market?
AR: On the retail side there is interest but the question is which product structure will work. Individual retail investors typically do not meet the minimums necessary to set up separate accounts. We’re discussing fund structures that will best meet the needs of that part of the market. Already we have a program that gives retail investors and brokers access to CTA strategies and extensive information. They can combine managers and do hypothetical scenarios with historical data to see how such a portfolio performed. We’re constantly enhancing this program and looking for managers to put on it.
OFI: Investors became more interested in separate managed accounts after the experience of 2008. Is that the best way to invest?
AR: It is nothing new for us. As a futures commission merchant, we’ve been doing managed accounts for many years. As long as your investment meets a certain minimum, you can get a managed account on our FCM platform But investors do need to be mindful that if they get a managed account with a small amount of money, the manager may not be able to replicate the benchmark fund’s performance in that account.
OFI: In the past, many investors avoided managed futures. Why is that?
AR: We need to demystify the strategies. There is a wrong perception that managed futures consists of long-term trend followers and they’re all the same. In fact, there is tremendous diversity. It’s a huge disservice to the industry to let the investing public believe managed futures is one single thing. There are some very good futures traders that are not trend followers, like many FX traders or global macro managers. These have different risk-adjusted return profiles and help diversify the portfolio.
OFI: What bothers investors about trend following?
AR: People complain that the trends turn before the models catch on, but there are trend followers who leave some money on the table by getting out early to make sure they’re not hit by the trend reversal. Other traders won’t leave money on the table because they believe their program will retain a net gain by staying with the trend until it reverses. Which approach is right is not the issue here; what matters is that the investor understand these approaches. The client does not have to know the algorithms but does need to know the trader’s approach and feel comfortable with it.
OFI: How much do managers have to reveal?
AR: Managers can keep their secret sauce but investors need to know the risk they’re taking. People have a choice of investing with someone who makes outsized returns with huge volatility or someone with possibly lower return but also lower volatility. If the client can tell us what their acceptable limits are, we can search for managers whose past performance fits that profile.
OFI: Why do people misperceive managed futures?
AR: There are proven benefits to adding a well-constructed managed futures investment to a portfolio of stocks, bonds and some hedge funds. So why aren’t people flocking to the strategy? I think the difficulties are mostly self inflicted. We don’t do a very good job explaining how futures work, because we talk like financial engineers. Take the technical language we use—it is not familiar to mainstream investors. In long-only asset management, you don’t hear terms like drawdown and VAMI (value-added monthly index). Also, the nature of some of the strategies where there is a technical black box makes traditional US investors uncomfortable. In the US, people like stocks in part because a company has a story. In managed future it’s harder to tell a story that people can relate to. True, there is the commodity story with global growth and demand from China and India. That is a great theme but only part of what CTAs do. A big challenge we’re taking on as MF Global is to try to de-mystify managed futures. The onus is on us and other product providers to learn to communicate better.
OFI: What do you say to an investor who’s seen CTAs have big drawdowns and believes that futures trading is very risky?
AR: Old notions of uncontrolled risk and massive volatility are a thing of the past for top-shelf managers. One of the untold stories that needs more attention is the incredible use of modern technology to the benefit of investors. Compared to even 10 years ago, there is now much greater computing power, ability to process vast numbers of data points and better analytical tools for risk management. It’s like the difference between today’s microscopic surgery for a knee injury vs. traditional open surgery. New technology can be used to run much better risk controlled trading programs than before.
OFI: Doesn’t that require special skills?
AR: Due diligence is essential to determine how a manager is using technology to control risk. For instance, to catch significant developments, a manager should use daily data to do risk analysis. Without a doubt there are higher-caliber managers who are better at applying technology and have a keen sense for tight risk management. You have to do in-depth due diligence to pick those.
OFI: With equity markets recovering, has managed futures missed its chance to attract capital at this point in the business cycle?
AR: We haven’t missed anything. The best is in front of us. But we have to earn it with properly tailored products and good explanations of both the benefits and the risks. There is a lot of money in motion, with $3.5 trillion still sitting in money market funds, earning only a few basis points. Probably $1.5 trillion will be moving. Given that there are amazingly high-quality futures managers, I think we’re at the early innings of this business.