The 2008 financial crisis served as a wakeup call to many investors about the need to diversify into asset classes that perform well even in challenging markets. They might do well to look to managed futures. As equities got hammered in 2008, managed futures returned 18%, demonstrating their value as a diversifier.
Equinox Fund Management is a company that has been trying to get the message out about managed futures since well before the financial collapse.
Historically, managed futures have been the domain of institutional and very high-net-worth investors. They have remained largely unknown to retail investors. The founders of Equinox Fund Management sought to change that when they hung out their shingle in Denver in 2003. Founders Richard Bornhoft and John Plimpton were determined to bring institutional quality products in alternative investment arenas to retail investors and bring innovative product features into the broker-dealer and RIA channels, says Robert Enck, the firm's president and chief executive. (Bornhoft serves as the firm's chief investment officer. Plimpton, who had been serving as principal, passed away on August 12 at the age of 44.)
The two men certainly had the collective experience to accomplish this goal. Bornhoft had been active in the managed futures arena for nearly 20 years. He founded his eponymous investment management firm in 1985, specializing in the creation, evaluation and risk monitoring of managed futures investment portfolios for institutional and individual investors. Plimpton's career had focused on structuring and distributing alternative investment products, including managed futures, to mass affluent investors. He was also involved in a number of specialty finance transactions, including third-party marketing.
When the two men met early this decade, Enck says, they realized that their skill sets were complementary and decided to form Equinox as a commodity pool operator and a registered investment advisor. Enck joined the firm in March 2007 from The Hermes Group LLC, a merchant banking and corporate advisory firm where he was senior managing director.
Broadening The Investor Base
Equinox rolled out its first product, the Frontier Fund, in late 2004. The fund is a public commodity pool that allocates to baskets of managed futures programs in 11 different series. One series, for example, strives to be highly diversified. Another focuses on long/short commodity strategies. Equinox has a managed account with the manager of each series-a commodity trading advisor or "CTA." This gives it total transparency and allows it to do daily pricing. The fund offers daily liquidity and levies no charge for switching between series.
Equinox made the Frontier Fund, which has about $800 million under management, available to mass affluent investors by securing selling agreements with some 50 broker-dealers, among them Charles Schwab, Fidelity, LPL Financial, Stifel Nicholas and TD Ameritrade. "We believe that with this asset class, having a trusted financial advisor or even a fiduciary in an RIA available to consult with the investor is a very important part of the process," says Enck.
Equinox also launched a private investment vehicle called the Equinox Private Legend Fund. This allows an investor, working with a financial advisor or RIA, to manage a customized portfolio with allocations to one or more of three top CTAs: Tiverton, Beach Horizon and Cantab.
At the end of 2009, Equinox moved to bring managed futures to retail investors when it launched MutualHedge Frontier Legend Fund, which provides exposure to an actively managed portfolio of highly diversified CTA programs. Enck says the firm's research indicates that MutualHedge is the first product of its kind in the market.
Investors in the fund enjoy daily liquidity. "To have an actively managed portfolio of CTA programs in a mutual fund structure provides investors the security of a '40 Act fund, but the liquidity benefits are truly important for investors," says Enck.
By the beginning of August, MutualHedge had $70 million under management, much of that coming in during the previous two months. RBC and Fidelity have made the fund available to their clients, Enck says.
Once Equinox has a selling agreement with a broker-dealer in place, Enck says, an Equinox wholesaler meets with the financial advisors associated with the broker-dealer or RIA to provide education on managed futures. Education is critical because managed futures comprise a relatively obscure asset class, he says. "It's different from stocks, bonds and cash, the typical diversification strategy most people utilize," says Enck. "The more investors and RIAs and financial advisors learn about this category, typically the more they utilize the category."
From 1980 to March 2010, managed futures, as measured by the CASAM CISDM CTA Equal Weighted Index, had a compound average annual return of 14.52%, while U.S. stocks in the S&P 500 index returned 7.04%.
Managed futures are offered by CTAs, who are regulated by the U.S. Commodity Futures Trading Commission and the National Futures Association. CTAs use proprietary trading systems to manage their clients' assets and generally take long or short positions in global financial and commodity futures contracts. Strategies vary widely. Many CTAs employ a trend-following strategy, where they try to capture and hold long-term market trends. Others try to take advantage of the reversals of such long-term trends.
Enck says Equinox's business thrived in 2008 when the financial crisis took hold, thanks to the peculiar nature of managed futures. He notes that over the last 25 to 30 years, when national or global catastrophic events have struck, managed futures have typically done very well.
Enck points out that because many CTA programs follow trends, they often get hit hard when trends reverse, losing money before the programs catch up with the change.