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Opalesque Futures Intelligence

Regulators: A US mutual fund that invests in CTAs: What does the regulatory format mean in practice?

Tuesday, November 16, 2010

A Pioneering Mutual Fund
By Chidem Kurdas

US mutual funds with managed futures strategies are a small but growing sector. Some of these funds track indexes, others are actively managed by a commodity trading advisor. MutualHedge Frontier Legends Fund from Equinox - see Inside Talk with manager Richard Bornhoft - is distinctive in offering a portfolio of top-level CTAs to a broader public.

Five well-known CTAs are currently selected for managing portions for the fund (listed in the table). What does the mutual fund regulatory format mean for an investor as a way of getting access to these managers?

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CTA Programs Selected for MutualHedge Frontier Legends, as of Sep 30th

Winton Diversified Program
Tiverton Discretionary Program
QIM Global Program
Beach Horizon - Horizon Program
Cantab - Aristarchus Program

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Here are some key features of Frontier Legends:

  • Minimum initial investment is $2,500 and minimum additional investment is $500.
  • The net expense ratio for Class A shares is 2.20%, including a 1.70% advisory fee.
  • Net asset value for the fund is calculated at the close of regular trading on each day the New York Stock Exchange is open for business.
  • The NAV for a particular day is applicable to all purchases of shares and redemption requests received before the close of trading on the NYSE that day.
  • Securities in the portfolio are valued at the last quoted sales price on the security's primary exchange. Procedures to be followed if market quotes are not available for a security are specified in the fund's prospectus.

The fund has a special structure for investing in CTA programs It will invest up to 25% of its assets in a wholly owned subsidiary. The subsidiary in turn will invest in the selected programs so as to provide aggregate exposure as if 100% of the fund's net assets were invested in the programs.

Mutual funds with alternatives strategies like this one tend to be sold to individuals through financial advisers. Their reach in the American mass affluent market has been limited so far, but the trend is clearly positive.

One of the mutual funds in this sector is Rydex/SGI managed futures, with about $2.1 billion in assets (all share classes combined). But Rydex/SGI managed futures does not invest in CTAs. Rather, its object is to match the daily performance of the S&P Diversified Trends Indicator, using futures, options and other instruments. The performance of a portfolio of top CTAs can be very different from an index like the S&P Diversified Trends Indicator.

Now that the mutual fund regulatory structure has been adapted to managed futures, new products are likely to follow.

Frontier Legends is one of a family of MutualHedge funds managed by Equinox. The others invest in hedge fund strategies like long/short equity and event driven. The MutualHedge fund family was launched at the beginning of this year.



 
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