Chatting with Gary Fencik- Meeting of the Alternative Minds

June 5, 2012 By Leave a Comment

While attending the CFA Conference in Chicago, we had the distinct pleasure of meeting with Gary Fencik (yes, good old #45 from the 1985 Chicago Bears Super Bowl-winning team) who is a partner of the firm and Head of Business Development at Adams Street Partners, LLC. This interview is a little removed from the conference, but good things come to those who wait, and in a rare turn of events, we’re writing about an alternative investment that’s NOT managed futures with an expert in his field who also happens to be a former player of our all-time favorite football team. Cut us a little slack, eh?

Welcome to the world of Private Equity (PE). Though traditionally an investment offered to only the incredibly wealthy through a network of finance professionals, PE has been thrust into the spotlight repeatedly during the Republican Presidential primary, with continued reference to Republican candidate Mitt Romney’s work with PE firm Bain Capital, but outside of the knowledge that he invested in companies, most people have no idea what, exactly was being done. Essentially, it involves raising capital privately (read: off-exchange) to invest in a company. PE is typically characterized by a long term investing timeframe, a lack of liquidity, and high risk. These investments can be a 10+ year commitment, which is why those in the know refer to that investment point as the point of “losing control.” As such, with a countless number of direct offerings and 1,000’s of funds pooling investor capital worldwide, the core principles of alternative investment allocation strategies hold true even in the PE world.  With hundreds of billions of dollars being invested in PE worldwide, and often in incredibly diverse investing environments among a wide variety of companies, it is clear why the expertise of Adams Street (a leader in PE for nearly 40 years) makes sense to employ.

As the conversation moved from a high level discussion on Adams Street and their PE work, we quickly found common ground on several topics that tie directly back to the core of why alternatives and the ever changing task of investing in them.

For many investors, understanding the need for the diversification value found in alternatives is easy. The perspective through the rearview mirror reflects what many in our space have come to see as a universal truth- that past performance cannot predict the future, but your best bet is to spread your risk and exposure across non-correlated asset classes. For us, the solution was managed futures, Fencik, however, became a strong believer in PE. After opening an office in London in the late 1990s to go global, Fencik and his team found that the rise of Asia had changed the PE landscape, and introduced a new set of challenges. He told us that he believes in the need to work with locals, to make sure you have the right tools, data and people on the ground doing the due diligence, reaffirming some of the sentiments expressed by Sam Zell.

As it relates to portfolio construction, Fencik recommended diversification across different sub-classes and emphasized manager selection as the most important part of evaluating an investment. Whether it’s a giant fund or a small venture, an investment in the US or abroad, the quality of the manager remains most important. He looks for a repeatable process to separate the lucky from the skilled (is there an echo in here?), and remains wary of style drift by an investment team (again, choose your team wisely). Firms tend to raise capital based on past performance, so if they have underperformed since, you need to identify what changes have been made, how the manager is performing against their peer group (not all strategies are built for all environments), as well as whether the size and style of trading are still compatible with your investment objectives.

As huge Bears fans and past season ticket holders, any conversation with Gary Fencik cannot go without a few questions for one of the former Monsters of Midway. One topic that has always been the topic of debate for outsiders is the notion that professional athletes don’t know how to manage their finances.  Fencik unfortunately agrees with this statement, stating that most players have no concept of how short their career will be. As a Yale grad and financial professional, he fully believes in educating athletes on their finances and goes as far as to commit to the NFL’s yearly week long seminar for current and recently retired players where he speaks about managing finances and looking at the longer term picture.

His advice for pro athletes is to spend time with their accountants to help know their net income now, to set a current budget and one for a post NFL career.  Finally he strongly encourages active athletes to network and take advantage of their celebrity status. If a current player asks for a meeting with the CEO of a company, he’ll get the meeting, but 2-3 years removed from the league, he’ll have to fight the HR fight.  Fencik also named at least 10 players from his teams who are now coaches… even though none of them initially aspired to be coaches.

Finally, we asked him about his best and worst personal investments; generally speaking, this is one of our favorite questions to ask anyone, because everyone usually has a good story. The worst investment decision happened to occur while he was playing football – he put money into a seafood delivery service. His best investment was in his college roommate: the founder of Summit Partners (one of the benefits of going to Yale, right?).

Our chat with Fencik was definitely an interesting one. Forget the fan component for a second- it was just nice to talk to someone in alternatives who gets it. Fencik understands the true diversification value of an alternative investment, and while we don’t see ourselves persuading him to abandon the PE world, we look forward to seeing managed futures become his second favorite asset class.

Filed Under: Why Alternatives? Tagged With: , , , , ,

The Why Alternatives? Wrap Up

May 15, 2012 By Leave a Comment

We’ve had a couple of days now to recover from a week of conference coverage, and we’ve found ourselves reflecting upon the value provided by each conference, along with common threads between the arguably diverse audiences.

CFA provided some excellent macro insight, particularly regarding how to apply that information to portfolio construction for investors. The high level conversation not only served as a source of education, but as a means of idea creation. The group was distinctively focused on thought leadership. NAPFA, while also largely attracting RIAs, simply nailed it on one of our favorite topics- how to best serve the client. The group exhibited a strong dedication to client service in addition to developing solutions that would better enhance the investing experience, with the backbone behind it all an unwavering belief in acting with integrity. SALT was definitely a different crowd, replete with hedge fund managers and institutional investors, with much of the conversation centered on how the macro climate was going to impact the markets, specifically, over the course of the next several years, and an in-depth look at strategy development and execution.

Without a doubt, the conferences were hotbeds of valuable information and perspectives, but perhaps more valuable still was the ability to see commonalities among the three unique events. Three things really stuck out. For starters, everyone is worried about Europe, and nobody has a clue what’s coming next. It may have been easy to look past the Euro Crisis over the last couple of months, with seeming indifference radiating out of the markets for quite some time, but in the background, no one thinks that everything is ok, and no one can say with any confidence that it will be. The general tone would seem more indicative of a “wait and see” mentality; people are just holding out hope that they can eke out whatever profits they can before that other shoe drops. This nervous tension, to us, further amplifies concerns about that fast approaching fiscal cliff and the political shenanigans it promises to deliver. If the markets are simply waiting for a definitive reason to run wild, that, in our minds, could very well be it.

The second common thread comes back to risk management. Risk is what everything came down to throughout the entirety of each of the conferences, so much so that when Troy Gayeski of SkyBridge quipped that investors also cared about returns on one of the panels, the idea nearly seemed foreign to the overarching conversation.  In some ways, this is good news. It means that people are trying to stay away from the poison mentality of chasing returns. However, our hope is that we don’t completely swing from one extreme to another; the best results, in our opinion, occur when you hold return relative to risk, and tailor your investment approach to your individual risk tolerance. We’re also hoping that people start getting more of the facts on managed futures as an asset class instead of turning to the mutual fund world as a benchmark, or resting their concerns on false assumptions related to the wide array of available strategies. It’s enough to give us heart palpitations listening to some of the uninformed perspectives out there.

Finally, while there are obviously stark differences in opinion on a wide host of issues across the entirety of finance, what was most impressive was the collaborate atmosphere we saw at each event. While technically, most of these folks are in competition over market share in one capacity or another, conversations had to do with learning, growing, and bettering the industry as a whole. Regulatory banter was not couched in laments about costs imposed, but instead, their impact on the markets and the investor. Political back and forth wasn’t about party lines, but what we’d see happen to the way various investments operate. Protection of assets overshadowed assets under management, and while marketing spin was certainly out in full force, candor won the day. It’s easy to cast the financial world into the role of the villain these days, but the undercurrent of fully acknowledged responsibility at these events make the dichotomy ring a little bit hollow.

All in all, fantastic job to NAPFA, CFA and SkyBridge for putting on stellar events- and kudos to the community for making them a great experience.

Filed Under: Why Alternatives? Tagged With: , , , , , ,

Attain presents Why Alternatives?: CFA Interview with Scott Welch

May 11, 2012 By Leave a Comment

Scott Welch, Co-Founder and Senior Managing Director of Fortigent, LLC presented at CFA, and we had a chance to talk with him afterwards. Fortigent provides “wealth management solutions and consulting services to independent investment advisors, banks and trust companies, and break-away brokers,” and his presentation, “The Evolution of Alternative Investing: New Approaches, New Thinking, New Conversations,” was as “Why NOT Alternatives“ as it gets.  One exciting note for us was that Managed Futures is “in his bucket of alternatives” and that his outlook is optimistic about the future of the space (despite the current difficult environment)!

Welch said that part of the problem for managed futures in the current trading environment is that the market is being manipulated. The influence of central bankers is getting in the way of the traditional long to medium term trend based managers allowing for the best opportunities on shorter time horizons.  In many cases the signals may be good, but manipulation is killing what would otherwise be successful trades.

His market outlook for alternatives, in general, is that they will play important role in portfolios, especially during volatile market regimes. In fact, Welch recommends allocations as high as 30-50% to alternatives.

As investors move more and more toward alternatives, it will be important to think in a “new way” about the markets. Specifically, Long / Short Equity should be considered more of a dynamic stock allocation vs an alternative strategy; investors and their advisors should customize their portfolios with respect to 1. Risk, 2. Return, 3. Liquidity, 4. Fees.; and finally investors and their advisors should be open to a more tactical approach to alternative investing.

Welch emphasized that market regimes change and placed a great deal of importance on portfolio allocation strategy as well as setting realistic investor expectations through up front and ongoing education. In his opinion, the main obstacle holding back RIAs from investing in alternatives is not due to a lack of investor education on alternatives.  Instead, he says, RIAs know what they are, but are gun shy after being burned by LPs (limited partnerships) during the global financial crisis (fraud, gates, etc).  That said, advisor aversion to LP’s is no longer a viable reason to avoid alternatives, however the due diligence requirements in the space have increased.

We also had a chance to talk with Welch about Fortigent being purchased by LPL Financial. Fortigent and their 100 employees have joined a firm that provides technology, brokerage, and investment advisory services to over 12,500 financial advisors.  Welch says that Fortigent will retain its autonomy despite the merger, as the LPL investment team has very specific mandate.

At Fortigent, the investment team remains consistent. They have 10 employees in research that are actively looking for new and unique strategies, which, once approved, are chosen by the advisors. Being able to provide the seal of approval by their 10 person team is the value that Fortigent adds.

We also asked him about alternative investment mutual funds: he thinks there are too many starting too fast, requiring more belief than proof in each product. In his view, due to shorter track records, there is a need to focus greater due diligence on operations, the team, the underlying strategies, etc. This is clearly a strong focus for the firm as Fortigent brought on 20-25 new alternative investment mutual funds last year, and in total the firm has invested two to three billion dollars in AI mutual funds.

The above statements were echoed as it relates to managed futures mutual funds as well; due to the short public track records, more belief than proof in each product is required. This creates a need to focus due diligence efforts on operations, management team, underlying strategies, etc. Scott believes that the industry will continue to grow alongside the regulatory environment adjustments.

The last question, and one our favorites, revolved around the large vs. small manager debate.  The data we’ve published (here and here)  supports the fact that the larger a manager gets the lower his expected rates of return (Harding admits it it here).  Welch agrees, stating that smaller managers have proven that they can be more nimble, invest in less traditional markets, etc; however the bottom line is that investor behavior is not following the talk.  Data flows support that investors are willing to trade enterprise strength for lower performance.

We greatly appreciate the opportunity to have met Mr. Welch and his continued advocacy of managed futures as a core part of investor asset allocation strategy.

Filed Under: Why Alternatives? Tagged With: , , , , ,

Attain presents Why Alternatives?: Best of the SALT 2012 Breakout Sessions

May 10, 2012 By Leave a Comment

The breakout sessions this afternoon at SALT have been particularly valuable. First up for us was “Man vs. Machine: A Comparison between Discretionary and Systematic Alpha Creation.” The panel was interesting in that the “vs.” in the title indicated there might be a debate… but the content was pretty one sided. The managers on the panel presented, pretty convincingly, the benefits of working with a systematic program, but a defense of discretionary programs never really emerged. We work with several discretionary managers, but we could definitely concur with the panel participants, which included Jerry Parker of Chesapeake and Chris Stanton of Sunrise Capital, in that discretionary managers, traditionally, are far more difficult to conduct due diligence on.

Next up, “A Broader Reach: How the JOBS Act Impacts Hedge Funds.” The JOBS Act has been a hot topic, with the big revelation being that hedge funds may be able to advertise themselves. What was uniquely intriguing to us is that the law creates yet another jurisdictional intersection in the regulatory landscape for managed futures. Programs that have been registered under several particular exemptions, or plan to register their fund under a 4.7 exemption with the CFTC for instance, theoretically, could be covered by the JOBS Act, but given that jurisdiction is being given to the SEC under the law, you have to wonder if we might be facing another regulatory battle royale as the agencies jockey for oversight.

The JOBS Act panel took a rather rosy outlook of the impact of advertising on the industry for those who are covered, embracing marketing concepts and case studies that seemed to have very tenuous parallels to hedge funds (Really? Selling Marlboro Reds is the same as a $5mm minimum investment hedge fund?), but there are some developments out there which indicate that hedge funds are gearing up for a digital push, at least. For instance, Victor Park of Alternative Assets pointed to the sweep we’ve seen in “keyword” domains in recent months (think www.startarb.com).

As far as which managers will be taking advantage of the developments, the panel was divided. Some believed that it would be small to mid-sized managers, whereas others believed the “big dogs” in the space would be the most aggressive participants. Hillel M. Bennett of the Partner Private Funds Group at Stroock & Stroock & Lavan, LLP, however, drew on similarities between the hedge fund space and law firms. There was a time where law firms were legally not allowed to advertise, and while the ban was eventually lifted, and we all see ads and commercial spots with 1-800 numbers everywhere we go, the bulk of lawyers, particularly more prestigious firms, still choose not to advertise because they “don’t see themselves that way.” In Bennett’s mind, we’ll likely see the same kinds of development in the hedge fund space, and while the interpretation will hopefully make sense of some of the more antiquated regulations on hedge funds, we simply won’t know the full impact until July.

Filed Under: Why Alternatives? Tagged With: , , ,

Attain presents Why Alternatives?: Looking into Emerging Market Exposure

May 10, 2012 By Leave a Comment

There was an interesting talk on identifying opportunities within emerging markets at SALT today, with an all-star panel of speakers from a host of emerging markets funds. The big focus (again) was on the global sociopolitical climate, highlighting once more the growing interconnection of the markets.  A lot of the concern relates to what kinds of emerging markets are susceptible to the European deleveraging process – a tricky point of evaluation for sure.

We’ve written in the past about how difficult effectively executing on emerging market strategies can be, but most will agree that some kind of international exposure in your portfolio is important. The question we hear from investors relates to how global exposure works in the managed futures space.

In many ways, CTAs achieve global exposure by participation in liquid markets around the world, but there are CTAs that use market selection to explicitly and strategically garner some forms of international exposure. The most common form is likely international bond positions – where we CTAs trade everything from New Zealand Bank Bills to Euro Bunds; followed closely by currency futures in markets as common as the Japanese Yen and as far flung as the Norwegian Krone, and finally by regionally important commodities such as Coffee = Latin America, Cocoa = Cote D’Ivoire, Palm Oil = Indonesia/Malaysia, and so on.

Emerging market hedge funds are not our specialty, by a long shot, and we will say this – we’re glad we’re not making the decisions they have to.

Filed Under: Why Alternatives? Tagged With: , , , ,

Attain presents Why Alternatives?: Hedge Fund Mutualization at SALT 2012

May 10, 2012 By Leave a Comment

If you read our blog… ever… you know we don’t like managed futures mutual funds. To be honest, we sort of feel like we’ve been lashing out at the space a little too much lately, but they make it so easy. When we saw there was a presentation on the “mutualization” of hedge funds at SALT 2012, there was no way we were going to miss it.

What was interesting in listening to the presentations by Ramius Trading Strategies and WisdomTree,  we heard more and more about how well-suited managed futures was to the space. Obviously, we disagree, but what killed us was that, in speaking to an institutional crowd, they described the benefits of the managed futures mutual funds as being liquidity. What’s cute about that play is that, at the end of the day, these institutional investors can do managed accounts – which takes those performance-eating fees out of the equation – with the same beautiful daily transparency and liquidity.

When pressed on some of the data (like tracking error statistics), questions were deflected, while the panelists framed the conversation as too sophisticated to get into. Really? If anything, this is the crowd that should be able to get it.

We’re still waiting to hear a solid defense of the managed futures mutual fund space. If you’re qualified to invest in an LP or managed account, we cannot think of a single reason why you would bother even considering a managed futures mutual fund. We’d hoped we’d at least hear an interesting take here. So far, it’s been pretty disappointing in that respect.

Filed Under: Why Alternatives? Tagged With: , , , , ,

Attain presents Why Alternatives?: The Future of VIX Futures

May 10, 2012 By Leave a Comment

As our discussion of alternatives continues this week, we took a moment to chat with James Lubin of the CBOE, where he works closely with those promoting VIX futures. We’ve touched on VIX futures in the managed futures space in the past, but seeing as it’s a market that has yet to be thoroughly explored by the CTA space. James broke down some of the dynamics and history of the market, and if you ask us, it should be an interesting alternatives market to watch over the coming years.

Disclaimer: Futures trading is complex, and presents the risk of substantial losses. As such, it may not be suitable for all investors.

1. When were VIX futures introduced?

CBOE Volatility Index (the VIX Index) futures were launched on the CBOE Futures Exchange (CFE) in 2004.  The contract has witnessed particularly wide acceptance and broader participation since the 2008 financial crisis, when the U.S. stock market lost more than a third of its value. During this period, alternative investments such as real estate, commodities and hedge funds suffered similar declines and provided little, if any, diversification benefits. The spotlight shown brighter on the diversification value of the CBOE VIX Index after those events.

2. What went into the development of the contract?

In 2003, CBOE revised the methodology for the CBOE Volatility Index to measure the implied volatility being projected through prices of S&P 500 index options (SPX), versus through prices of S&P 100 options (OEX) as had been in place since 1993.  By incorporating a variety of options in the calculation, the “new” VIX index offers an indication of 30-day implied volatility as priced by the options market. Incidentally, the VXO index, reflecting implied volatility of the OEX, still exists, but the VIX Index created in 2003 is the benchmark that most volatility traders look to for portfolio diversification of the broader market as a whole.

3. What has the growth of the market been like?

Liquidity in VIX futures, as measured both in volume and open interest, has been quite impressive.  Average daily volume, the standard metric in the futures industry, has risen over the past few years, from 17,000 contracts in 2010 to 48,000 contracts in 2011 to 67,000 contracts in 2012 YTD.

4. What kind of demographics are trading VIX futures- is it mostly institutional or professional money manager type investors? Are more retail investors joining the game?

Participation in VIX futures has been primarily institutional investors and professional money managers.  The constituents within the institutional client classification include: ETF/ETN providers, commodity trading advisors, hedge funds, investment banks and proprietary trading firms.  We have also seen more interest from the high net worth investor, not only in VIX futures, but also in our Emerging Markets VIX and Brazil Equity VIX futures products.

5. What benefit do you think VIX futures offer to professional money managers?

A professional money manager’s portfolio can typically be segmented into six assets classes: fixed income, equity, foreign exchange, energy, metals and agriculture.  Volatility represents a seventh asset class, a source of alpha that has been unable to be pursued prior to the listing of VIX futures.  The inclusion of VIX futures in a diversified portfolio provides the professional money manager with an instrument that adds the potential for diversification benefits as well as for achieving non-correlated returns.

6. Working in the alternative investment space, how important do you believe alternatives are to the average investor’s portfolio?

As we know from academic studies and through correlation analysis such as the Efficient Frontier, diversification is a key component in obtaining improved risk-adjusted returns.  The addition of alternative investments — provided the investor fully understands the risk-reward scenarios — is valid for a typical equity/fixed income portfolio seeking to obtain diversification.   At the same time, investors must understand the risks involved when investing in alternatives and obtain professional advice to determine the percentage allocation they should devote to alternative investment strategies.

Filed Under: Why Alternatives? Tagged With: , , ,
« Older Posts
Powered By Mow - Wordpress Popup Plugin