Turnkey Managed Account Investing
Two issues have become paramount for investors. After the nasty surprise Bernard Madoff delivered to his clients, people want to know what's happening to their money, i.e. transparency. And the gates put up by a large number of managers in the past year got investors worried about not being able to redeem. They want to be able to pull the money out when they need to, i.e. liquidity.
A managed account satisfies both needs. The investor owns the account, can check it at any time and can liquidate the portfolio at any time. We asked Aleks Kins, chief executive of AlphaMetrix, to discuss managed account investing. The firm offers investors a ready-made version of a managed account for investing with commodity trading advisors. The CTAs on the AlphaMetrix platform have combined assets of $2 billion.
Mr. Kins is a CTA investing specialist. Before founding AlphaMetrix, he was the president of Access Asset Management, where he built the Emerging CTA Index Fund and allocated several hundred million dollars to emerging advisors. Earlier in his career he was senior investment manager for Carr Global Advisors, a subsidiary of Cr©dit Agricole Indosuez. At Carr he made managed futures allocations and helped develop a daily CTA index.
Opalesque Futures Intelligence: What are the advantages of a managed account?
Aleks Kins: I saw the merits of managed accounts when I worked at Carr Global Advisors. You have control and transparency. You need to monitor and control any leveraged investment closely because in theory you could have unlimited liability with leverage.
OFI: What are the disadvantages?
AK: It takes time and resources to set up a managed account. Also, investors complain about tracking errorâ€”a managed account can make significantly less than the same strategy does in the fund format. There are many reasons for tracking errors. For instance, a small account size or higher fees can cause a lower return for the managed account. We've designed our system to minimize tracking error.
OFI: What exactly do you do?
AK: It's a turnkey approach to investing in managed futures. We do due diligence on both the traders and the money coming into the platform, so investors don't need to devote a lot of time and money to investigating. We've vetted more than 150 managers and track some 1,000 programs. Currently 36 CTAs are trading on the platform and a total of 60 are approved. The money is held in accounts at banks or brokerage firms in the name of the pool, not transferred to the traders. Our people do legal, operations, back office, research and risk management work.
OFI: Are you a fund of funds manager?
AK: We are not a fund of funds manager. The investor picks the traders and allocates the money. Nor are we a counterparty. Large commercial banks are counterparties. We provide the platform, which comes with a whole system of checks and balances. A third-party administrator manages the inflow and outflow of assets and monitors the accounts. Investors can have 24-hour risk monitoring and see where every penny is in near real-time, through the use of our proprietary technology. In some ways it is like an exchange, with standard terms and posted prices.
OFI: What do investors pay for your service?
AK: Investors do not pay any additional fees to us. We charge managers and brokerages to participate. Investors are charged the manager's standard fees, which are usually 2% and 20%.
OFI: Are investors showing interest?
AK: We see new investors making allocations. There is an influx of capital not just because of impressive performance by CTAs in 2008 but also because managed accounts is an established way of investing in futures and people now recognize the value of the transparency you get with a managed account. There's been a change in the investor culture. We have about 500 investors using the platform and they've been talking to us about expanding the service to other liquid strategies. Funds of funds and institutional investors are the largest source of investment on the platform.
OFI: Do you seed new CTAs?
AK: Not currently, but we will start a CTA incubator later this year. Our platform is the right structure for this. When you work with emerging CTAs, you can't take anything for granted, you even have to make sure they liquidate contracts before expiration. Implementing simple checks like that saves you trouble in the future and we have automated many such procedures, resulting in a very scalable solution.
OFI: What is the index fund you recently introduced?
AK: We've created an index fund of short-term CTAs, meaning programs that have an average holding period of less than ten days. It tracks Newedge's Short-Term Traders Index. Short-term strategies have little to no correlation to any traditional or alternative investments. Each program is highly liquid and transparent. Currently the index fund has 16 managers and approximately $90 million in assets.
OFI: How is the outlook for managed futures this year?
AK: CTAs tend to do well in unstable and inefficient markets. Many Wall Street firms are no longer trading and a lot of capital has been pulled out of futures markets. That makes these markets less efficient and more volatile. That, along with the possibility of inflation in the economy, means opportunity for CTAs.
Strategies on AlphaMetrix Platform