Fri, Apr 25, 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
Banner
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. Opalesque Exclusive: Rainwater and Blue Sky - an Australian water fund emerges[more]

    Bailey McCann, Opalesque New York: Financial reporters often tout new funds and investments as uncorrelated investments, but few can say they are uncorrelated to everything but weather. Enter Blue Sky Alternative's water fund which invests in the permanent rights to Australia's water. Sev

  2. Regulatory – Expect greater SEC scrutiny of hedge funds that share information or collaborate in advance of their trades, Alternative funds to get SEC test for leverage, liquidity[more]

    Expect greater SEC scrutiny of hedge funds that share information or collaborate in advance of their trades From Thelawyer.com: A recent Wall Street Journal article — ‘Activist investors often leak their plans to a favoured few’ — focused attention on ‘activist’ investors and stock analy

  3. …And Finally – This week's least competent criminal is Austrian[more]

    From ABCnews.go.com: A German sought by authorities for alleged fraud has been arrested in Austria — after dropping into a police station to ask officers whether he was under investigation. Police in Salzburg said the 59-year-old man walked into a police station in the city on Friday night. Sp

  4. Investing – Hedge funds find pitfalls along with profits in real estate ventures, Marcato Capital Management makes new bet on Dillard’s[more]

    Hedge funds find pitfalls along with profits in real estate ventures From Law360.com: Hedge funds have joined the rush to real estate deals and development in recent months to close the financing gap left by tightening bank standards, but attorneys say many aren't prepared for the disclo

  5. Agecroft Partners estimates 90% of hedge funds using social media[more]

    The use of social media has increased significantly within the hedge fund industry over the past couple of years. Social media is broadly used by investors as part of their due diligence process on hedge funds, by service providers in their sales efforts to hedge funds, and by hedge funds to enhance