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Insider Talk: A managed account platform will offer a variety of liquid strategies. What does that mean for investors and managers?

Wednesday, November 04, 2009

AlphaMetrix Diversifies: What Does It Mean?

AlphaMetrix, a provider of ready-made managed accounts for investing with commodity trading advisors, is adding new strategies to its platform. Jodie Gunzberg, who joined AlphaMetrix in June and is in charge of the expansion, discusses what this brings to investors and managers.

Ms. Gunzberg, former chief strategist at Marco Consulting Group, a major consultant to union pension plans, has investment management experience across several asset classes. She started as an actuary, moved to real estate, fixed income and then equities. Since 2001 she has worked with hedge funds, managing a number of strategies and engineering risk systems.

"Historically there has been very low correlation between CTAs and long/short equity. Using our platform, an investor can combine these strategies to add higher return potential with lower risk to their portfolio."

Opalesque Futures Intelligence: Which hedge fund strategies do you see as promising?
Jodie Gunzberg: Since the subprime market blew up in 2007 opportunities have been greater than ever, even as the industry went through a period of de-leveraging and some areas were badly hit. There is great opportunity especially in long/short equity. After long-only strategies lost a lot of money last year, investors want alpha from equities. They seek strategies that protect on the downside.

OFI: How is that relevant for a managed account platform?
JG: When you move away from long-only beta strategies, the issue is how you keep some of the characteristics that you like about traditional equity investments, such as liquidity, transparency and lower fees. Managed accounts give you certain alpha strategies with beta-like safety features. We see a huge demand for liquid alternative strategies and that's the direction in which we're developing the business.

OFI: What strategies do you see AlphaMetrix offering?
JG: We already have FX funds and some global macro that involves futures trading, but any liquid strategy can meet the managed account requirements, whether in the equity or fixed income space.

OFI: Which long/short equity styles are interesting?
JG: We like mid-cap and large-cap styles, which provide more liquidity than small-cap stocks. Long-only large-cap has the most trouble producing alpha, so long/short alpha strategies in that area are desirable, coupled with indexing for beta exposure. Sector funds are also very interesting. I'm thinking especially of long/short healthcare, technology, financial and energy funds. Sector specialists might be more skilled in investing in those sectors than generalists. Having them on our platform will allow with investors to create their own portfolios with low minimums and high liquidity.

OFI: Do these strategies have the same liquidity as CTAs?
JG: Our goal is to make the accounts as liquid as possible. We will work with the managers to get liquidity. Overall, we will choose strategies that fit a similar managed account structure as the CTAs.

OFI: How will investors use the platform once it includes other strategies in addition to CTAs and global macro?
JG: We can divide the universe into parts in order to give the investors the wherewithal to construct diversified portfolios. Investors will be able to combine fundamental versus quantitative strategies, short- and long-biased styles, concentrated and diversified funds. They can adjust allocations to get the desired levels of exposure to each asset class. We have drill-downs to managers' position-level holdings so we can see how much overall risk there is in commodities, currencies, stocks, bonds and subsectors.

OFI: Do investors see managers' positions?
JG: Investors do not necessarily see trade-level data; they might get sector exposures. It depends on the agreement they have with the manager and how many managers they invest with on the platform. It is important to managers that the world does not see their positions. But AlphaMetrix has the transparency to see all positions and investors take comfort in knowing that. We have an entire risk management department that not only generates risk measures but also monitors them.

OFI: What do investors want at this time?
JG: We're seeing more interest on the equity side, which is partly because long/short equity is a major part of the market. Historically there has been very low correlation between CTAs and long/short equity. Using our platform, an investor can combine these strategies to add higher return potential with lower risk to their portfolio. And they can see all of their aggregate exposures. This an easy, one-stop solution for the client.

OFI: How would people construct portfolios using a managed account platform?
JG: There are many ways of doing that. It depends on the investor's objective. An investor looking for traditional diversification can find managers with low correlations to each other. You can specify a maximum drawdown to create a portfolio with maximum drawdown of less than that percentage. You could construct a volatility-adjusted portfolio based on risk budgets by specifying what percentage of exposure you want in equities, currencies, commodities, and interest rates. Each of these classes has a certain volatility. We have tools that clients can use to achieve their targets.

OFI: On the basis of your pension experience, how would this setup fit a pension's needs?
JG: 2008 changed people's perspective. Like the rest of the world, pensions want more transparency and liquidity, proper custody for assets and lower minimums for extra diversification. Managed account platforms offers these features. For instance, required minimum investments are low. Once an account is funded, minimums drop to perhaps $100,000 and as low as $10,000 on retail platforms. By contrast, the minimum for a separate account with a hedge fund manager is typically a million dollars and up. Low minimums enable investors to construct a diversified portfolio much more efficiently. They get more managers with less money.

OFI: Are there other ways investors can reduce their cost?
JG: Another way to construct a portfolio is the core-satellite approach, using alpha and beta returns to decompose risk by the exposures of CTAs and hedge funds. You determine how much alpha and beta a manager has and how these overlap with other strategies. You don't want to pay so much for beta return, so you minimize the beta overlap.

"We see a huge demand for liquid alternative strategies and that's the direction in which we're developing the business."

This article was published in Opalesque Futures Intelligence.
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