Memo to financial advisors and wealth managers: According to Rydex Investments, investors can manage risk and maximize portfolio returns in the same way major institutions do.
Taking a leaf from the likes of Harvard, Princeton and Yale, whose endowments have been successfully invested in a variety of alternative products, Rydex is trying to democratize their institutional-like investment techniques down to the mainstream investor, and get financial advisors and wealth managers on board.
If it sounds a little esoteric, it is. But that's the point, too. With the introduction of a trio of risk-targeted funds of funds, the fund house, with $14 billion in assets under management, is providing a means by which retail investors can implement these strategies. The attempt is to manage risk in a more controlled way and enhance returns regardless of market conditions.
Unlike more traditional asset allocation models, the Rydex Essential Portfolios start with quantitatively defined risk targets-conservative, moderate, or aggressive-and build portfolios that periodically adjust their allocations within a tightly defined risk framework. Depending on the risk target, the funds include varying exposures to non-correlated asset classes and absolute return, long/short, and momentum strategies. The alternative asset classes include commodities and real estate.
"We're attempting to break out of the stock, bond, and cash box," David Reilly, director of portfolio strategies at Rydex, said at a press briefing in New York. "We're trying to build portfolios for investors that are more diversified with a higher probability of generating positive returns, while at the same time reducing risk." The proof of this, he said, is the endowment community, which in the last few years has achieved strong returns under difficult conditions. "They've relied less on traditional stocks and bonds and more on large allocations of other asset classes."
Rydex worked in conjunction with Princeton University Professor John M. Mulvey on his Essential Portfolio Theory white paper. EPT is an extension of Modern Portfolio Theory, which involves strategies relating primarily to equities, fixed income and cash. Rydex makes use of tenants outlined in the white paper, such as "true" diversification, using non-correlated asset classes and alternative strategies; use of leverage with diversification in an attempt to achieve a targeted risk/return objective, and moving away from long-only portfolio constraints.
Initial reaction from the advisor community has been positive. Jay C. Middleton, a CFP in Severna Park, Md., said the Rydex funds of funds were especially suitable for the smaller portfolios his shop manages, such as in 401(k) plans, where greater diversification is called for.
Rydex is using an arithmetic tool, called an "optimizer," to maximize the return for a given risk level, Reilly explained. "It tells us what the optimal asset mix is that will generate the greatest return for a given level of risk. Rydex is not charging a funds of fund fee. The expense is basically the average weighted expense of the funds within the funds.