The ever-growing liquid alternative fund space expanded a notch with today’s launch of the AdvisorShares Sunrise Multi-Strategy ETF (MULT), an actively managed fund using  a multi-model, multi-strategy quantitative investment approach that tactically takes long and short positions across various asset classes via exchange-traded products, futures, foreign currencies and U.S. Treasuries to provide long-term capital appreciation in any market environment.

The ETF is a collaboration between Bethesda, Md.-based fund sponsor AdvisorShares and Sunrise Capital Partners, a San Diego-based RIA and alternative investment shop. With the launch of MULT, AdvisorShares now sponsors 25 active ETFs with more than $1.9 billion in assets under management.

For Sunrise, the fund’s sub-advisor, MULT is its entrée into the ’40 Act fund space of liquid alternative products, a growing segment of funds from asset managers and hedge funds employing alternative strategies formerly reserved for institutions and accredited investors that are now being brought to the retail level with offerings compliant with the Investment Company Act of 1940 that governs open-end funds.

Sunrise oversees $175 million in client assets among high-net-worth individuals, small family offices, some foundations and a larger institutional-focused Wall Street investor with products that include a hedge fund and a separately managed account.

The MULT’s investment process uses a systematic algorithm that blends together numerous asset classes to create very low correlation to stocks and bonds while seeking to be profitable in any market condition.

Its quant strategy follows more than 50 different global financial and commodity markets and includes going long/short 15 equity index futures, 13 currency investments and seven bond investments; taking tactical long/neutral positions across 11 ETFs among equities and fixed income; and doing five currency crossrate-pair investments.

According to the company, MULT’s portfolio is flexible and can range from being invested in all of these different markets or just a handful, depending on which way the markets blow. The fund's net expense ratio is capped at 1.89 percent. The average expense ratio among the liquid alternative ETFs tracked by Morningstar Inc. is 0.88 percent.

Shock Absorber

Liquid alternative funds have been a growth area since the financial crisis, driven by investor demand for diversification and portfolio protection that are hallmarks of the alternative investment genre. But liquid alts on the whole have delivered subpar total returns vis–à–vis the stunning five-year run of the S&P 500 since its March 2009 lows, causing some investors to grouse they haven’t lived up to the hype.

If properly crafted, however, alternatives should provide some upside during good markets while acting as a safety net when markets tank. But they aren’t meant to beat the S&P 500 during raging bull markets such as in 2013.

“People who think alternatives aren’t working and not helping them are wrong,” says Sunrise CEO Jason Gerlach. “They’re fundamentally misunderstanding the value of having portfolio diversification. If everything is rocketing up at the same pace and time, the portfolios aren’t diversified.”

Gerlach says he expects MULT’s strategy to deliver good enough performance in bull markets to keep investors satisfied, while acting as a shock absorber in rough times.

All-Weather Vehicle

Sunrise was founded nearly 35 years ago, but the roots of its investment strategies go back further with Rick Slaughter, the firm’s chief research officer and co-portfolio manager of MULT. Slaughter launched his first systematic trading fund, Commodity Monitors, Inc. (CMI), after studying finance at San Diego State University in the 1970s.

In the early 1980s, he met two local radiologists from the University of California-San Diego who, like him, were investing using statistical investment models. 

The radiologists would each launch their own funds, including one in 1980 known as Sunrise Commodities Inc. After running CMI in parallel to Sunrise and the fund of his other radiologist peer for the next decade, Slaughter joined forces with them in 1995. Upon the merger, the three pooled their flagship funds and intellectual property. From that point, they worked together to continuously improve a single flagship investment program into its current multi-model, multi-strategy approach. 

The new AdvisorShares Sunrise Global Multi-Strategy ETF combines elements of Sunrise’s two existing products––a hedge fund called Sunrise Evolution derived from the efforts of Slaughter and the two radiologists, which follows a more super-charged multi-model, multi-strategy quantitative investment approach that includes 80 different markets (some of its investments don’t conform with ’40 Act mandates for open-end funds); and its U.S. Equity Optimized Growth program, a separately managed account available to all investors

According to Sunrise, $1,000 invested in Sunrise Evolution in 1980 would’ve been worth $612,999 as of January 1, 2013. That trounced equities, fixed income, real estate and the managed futures alternative investment strategy by a country mile.

The U.S. Equity Optimized Growth program uses a set of proprietary quantitative models to systematically allocate to any combination of the nine primary sectors of the S&P 500. That strategy can range from 100 percent to 0 percent in equities.

The program’s track record is considerably shorter than the hedge fund (it began in January 2012), but it did return more than 27 percent in last year’s bull market. Its stated goal is to participate in rising stock markets while placing an emphasis on preserving capital during severe and extended market declines.

“Having parts of both Evolution and U.S. Equity Optimized Growth is what gives MULT its all-weather profile,” says Chris Stanton, chief investment officer and co-portfolio manager of MULT.

Stanton and Gerlach stressed the boilerplate disclaimer that past performance of its existing products isn't a predictor of future performance of their new ETF, but they believe their product serves a purpose for investors.

“Investors need to have something in their portfolio to help them survive tail-risk events,” Stanton says. “This [MULT] gives that protection.”

As with any brand spanking new fund, time will tell.