Sat, Aug 23, 2014
A A A
Welcome Guest
Free Trial RSS
Get FREE trial access to our award winning publications
Opalesque Futures Intelligence

Five Minutes With Efficient Capital's Ernest Jaffarian

Tuesday, September 17, 2013

Efficient Capital® is a managed futures fund of funds that has collaborated with STOXX® to establish the iSTOXX® Efficient Capital® Managed Futures 20 Index, which tracks 20 of the largest Managed Futures Traders offering direct managed futures accounts. I sat down with Ernest Jaffarian, the firm's founder and CEO to discuss the new index.

Mark Melin: What was your motivation for establishing the iSTOXX® Efficient Capital® Managed Futures 20 Index ("Index")?

Ernest Jaffarian, founder of Efficient Capital, also serves on the National Futures Association
Board of Directors.

Ernest Jaffarian: It was actually at the initiation of STOXX®. They thought there was a need for an Index in the managed futures space that would be reflective of managed futures returns historically and could offer liquid and transparent access. When we first looked at it we were hesitant, but as we considered it further, we agreed with STOXX® that there is a need for a good Index return that is "real" in that a person can actually achieve the returns that closely replicate the Index. We also believed that institutional investors would appreciate the opportunity to get a good cross section of the industry and diversify their exposure rather than making the investment in one, two or three managers.

MM: How is your index different from the Newedge CTA index (which represents the 20 largest investible Commodity Trading Advisors ("CTAs") based on assets under management) or Barclay BTop 50 (which represents the top 50% of all investible CTAs based on assets under management)?

EJ: Actually the correlation with the Newedge CTA index and the Barclay BTop 50 is extremely high. There is significant overlap in the managers. There are differences. iSTOXX® Efficient Capital® Managed Futures 20 Index adjusts in changes in volatility among the managers as well as profits and losses among the managers. It is an equally weighted, risk adjusted index rebalanced monthly, making it unique. The second aspect that makes it unique is that it only utilizes Managed Futures managers who offer direct segregated managed accounts (not fund investments). It is an Index that has the potential for an investible product that can offer daily liquidity and transparency. The only way you can re-balance on a monthly basis is with a direct managed account.

MM: Let me loop back to the volatility weighting aspect of the index rebalancing that is unique. How does that work?

EJ: One of STOXX® criterion in any index is that it be 100% rules based. That doesn't preclude using appropriate investing principles; it just means they have to be quantified. In the case of this index we use a 36 month rolling volatility which is updated every month based on the previous month's returns. We then allocate provided a weighting to managers proportionate to their volatility impact on the composite portfolio.

Mathematically, it is fairly straight forward to demonstrate that equal weighting, adjusting for volatility, and rebalancing adds value over time to a risk adjusted return stream. There has been a lot written on this subject.

MM: Do you anticipate tracking error between the reported Index results and an actual investible Index performance?

EJ: There will always be tracking error by definition. The returns from the individual managers used to calculate the Index are the actual returns achieved by these managers. Returns can vary based upon various factors. A few factors relating to tracking error can be management and incentive fees, administration fees, audit fees, clearing fees, etc. However, we expect the overall fee structure in an investible index to be substantially less than the fee structure utilized to calculate the tracking index. There is some potential for positive slippage, which in an Index is almost unheard of.

MM: Efficient Capital® is known for identifying niche managers, yet the Index represents some of the largest and most well-known managers. How do you think will investors view this Index?

EJ: In a practical way I expect people to look at the Index as a cost effective way to achieve the much talked about "beta" in the managed futures industry. Institutional investors we have spoken to have already made the leap and asked: "Can you suggest to us managers who are not correlated to the Index who could provide additional diversification?" That is a sensible strategy: acquire the best of the industry in a cost effective method to mirror the returns of the Index, and then complement with some of the more unique talent and niche strategies available.



 
This article was published in Opalesque Futures Intelligence.
Opalesque Futures Intelligence
Opalesque Futures Intelligence
Opalesque Futures Intelligence
Today's Exclusives Today's Other Voices More Exclusives
Previous Opalesque Exclusives                                  
More Other Voices
Previous Other Voices                                               
Access Alternative Market Briefing
  • Top Forwarded
  • Top Tracked
  • Top Searched
  1. Institutions – Texas Employees sets 2015 tactical plan for alternatives, CalPERS' real estate consultant cautions the pension fund's investment committee, Why Sunsuper likes hedge funds[more]

    Texas Employees sets 2015 tactical plan for alternatives From PIOnline.com: Texas Employees Retirement System will invest in up to four new hedge funds in the next fiscal year, which begins Sept. 1. Trustees approved 2015 tactical investment plans for the hedge fund, private equity and in

  2. Private equity follows hedge funds into reinsurance for long-term capital[more]

    From Artemis.bm: It’s not just hedge funds that are entering the insurance and reinsurance market in search of so-called long-term capital to put to work in their strategies, private equity firms targeting the space are also seeking opportunities to add assets under management. The entry of large pr

  3. North America – New York City’s next hot neighborhoods targeted with property funds[more]

    From Bloomberg.com: New York’s real estate world is filled with tales of ordinary people who bought property decades ago and saw values skyrocket to the millions. Seth Weissman is seeking investors to get in early on the next hot neighborhoods. The veteran of Goldman Sachs Group Inc. and hedge

  4. Investing – George Soros bets $2bn on stock market collapse, Warren Buffett's Berkshire reveals Charter stake, cuts DirecTV, Hedge funds lusting to cash out of MGM, Top hedge fund managers are buying Ally Financial, Hedge funds dumped 5m Herbalife shares in Q2, Paulson & Co hedge fund ups Puerto Rico real estate bet, Netflix Inc., Citigroup Inc, Google Inc are top new picks in Tiger Management’s 13F[more]

    George Soros bets $2bn on stock market collapse From Newsmax.com: Billionaire investor George Soros has increased his financial bet that U.S. stocks will collapse to more than $2 billion. The legendary hedge fund manager has been raising his negative bet on the Standard & Poor's 500 Inde

  5. Investors now net short S&P500 and increased Russell shorts, technicals suggest further selling[more]

    Komfie Manalo, Opalesque Asia: Market Neutral funds increased their market exposure to -1% net short from -6% net short last week, according to Bank of America Merrill Lynch’s Hedge Fund Monitor. The report also added