Veteran Investor on Transparency & Control
Growing interest in commodity trading advisors raises questions as to the best way to invest. Alternatives include funds of funds, managed account platforms and individual separate accounts. To get a better sense of the options, we talked with Esther Goodman, one of the most experienced investors in the industry. She is the chief operating officer and senior executive vice president of Kenmar Group, a $1.5 billion fund of funds business and managed account platform.
Ms. Goodman started to work in commodity futures in 1974. She was a founder and principal of Westchester Commodity Management, a registered CTA, and later worked as a marketing executive at the well-known Commodities Corp. in Princeton, NJ. She joined Kenmar in 1986.
For more on managed accounts, transparency and control, see the next section, Futures Lab.
Esther Goodman "We want to make sure managers follow their trading policy and we get what we expected when we added a manager to the portfolio."
Opalesque Futures Intelligence: What is your experience with managed accounts?
Esther Goodman: Kenmar has been dealing with and investing through managed accounts for some 27 years. We started as a multi-manager futures business in the early 1980s and all of our investments were through managed accounts. Later we used managed accounts to invest in other strategies as well, but still the majority of our accounts are with commodity trading advisors and global macro, with a smattering of long/short equity primarily in the commodity and natural resource space.
OFI: From the investors' perspective, how different is a managed account from a regular pooled structure?
EG: Typically each legal entity - fund - owns a managed account and our clients invest in that fund. Kenmar monitors trading activity, positions and daily performance in each managed account. If we did not invest through managed accounts, we could not monitor trades-we'd lack transparency and control.
OFI: How much information do your clients get about a managed account?
EG: If the manager agrees and a client wants it, we will provide transparency to the investor and they will receive reports showing their specific pro rata share of positions. That's subject to the client signing a non-disclosure agreement, of course. We recently appointed GlobeOp as the independent administrator of the accounts. They provide risk analytics and a variety of customized reporting for us.
OFI: What if a client wants their own separate account rather than a pooled account?
EG: We do individual separate accounts if the client is large enough and the managers agree. Recently we did one for a UCITS product where the client wanted some of the smaller managers to be in a separate account. The managers who agreed to this went into the portfolio.
OFI: What is managers' view of managed accounts?
EG: Many large and even some small managers want only a limited number of managed accounts. They want to be judicious in their choice of the clients and platforms that get accounts. So it is not always possible to do a managed account. But at Kenmar we're lucky because we've been doing this for a long time and have close relationships with some of the large managers. The confidentiality of the trade information is a concern for managers. We've built up trust with them over the years.
OFI: What advantage does a managed account have over a regular fund?
EG: On a managed account platform, you have another party who watches what the manager is doing. If an investor requests a manager that is not on our platform we can do the due diligence, add them to the platform and monitor the investment.
OFI: Why would an investor be willing to pay a managed account platform?
EG: For a fund of funds or institutional investor that is not be able to analyze trade information themselves, the reason to invest through a managed account platform is that they believe the person who runs the platform can do the monitoring for them and shut a manager down if the manager violates their agreed-upon trading policies and risk limits. That's what the investor is paying for. We expect that managed accounts will continue to grow, but there will always be people who don't want to pay for the service.
OFI: As an overseerof accounts, what do you watch for?
EG: We want to make sure managers follow their trading policy and we get what we expected when we added a manager to the portfolio. We have over 25 years of experience with managed accounts, the ability to understand the trades and extensive knowledge in comparing and contrasting traders.
OFI: Are institutions interested in having separate accounts?
EG: We've managed a multi-manager futures portfolio for a mid-sized public pension plan for 12 years. The client receives daily portfolio level position information and knows that if their stop point were reached, we could get them out of one or all of the managers tomorrow.
OFI: Are commodity trading advisors getting more attention?
EG: In the past, CTAs were perhaps the black sheep of Wall Street. After being misunderstood for years, they are finally better understood and more widely accepted. Investors see that managed futures returns are no more volatile than equities. Also, the industry has grown a lot. Fifteen years ago you could not find anything but trend following CTAs, whereas today there are so many different strategies that you can really build risk-efficient portfolios. Investment strategies have matured and returns are less volatile than they were 30 years ago, when I got into the business.
OFI: With the growth of financial futures, do CTAs provide exposure to commodities?
EG: Large managers (those with $1-billion plus assets) generally have less exposure to commodity markets because of their size, but there are many specialized managers who trade commodities. Ten years ago these markets were relatively quiet but today you can find terrific commodity-only futures managers. However, specialist commodity managers tend to be smaller, so institutions are more inclined to rely on funds of funds in this area.
OFI: Is there a case for fund of funds in managed futures?
EG: I may be biased as a fund of funds manager, but investing in a CTA through a fund of funds makes a lot of sense. For one thing, you avoid some of the operational risks of investing directly in small CTAs with limited infrastructure. At Kenmar, we're used to dealing with both small and large CTAs. We think managed accounts are crucial because it is important to have the ability to monitor positions and get out when or if there is a trading violation. Many investors simply aren't set up to open and monitor their own managed accounts, making funds of funds a very viable solution.
OFI: How is the fund of funds business doing?
EG: Kenmar is well positioned in our niche space of futures, global macro, commodities and natural resources. This is a space where institutional investors are usually more comfortable investing with a fund of funds. The managers are often smaller niche traders that may be more time consuming to evaluate and monitor. By comparison, most larger institutions do their own due diligence and monitoring for long/short equity strategies.