Retirees are a big part of the firm’s client picture, he says, and Cabana has built something called an Alpha Income Portfolio as an annuity substitute. Business owners also make up a big part of the retail client base. “They want comprehensive counsel, planning, asset protection and ultimately, safe investments.”

Investment Approach

His approach to client risk led to him wanting to create his own investment solution that was safer—one that defined risk. He eventually brought in his uncle, James Mason, a statistician, and quantitative analyst David Covington, who had a background in electrical engineering and radio design for companies such as Motorola and Texas Instruments. “We actually built our own hardware at the beginning because we couldn’t even get a computer that would hold 2 terabytes of data,” says Chadd Mason.

The original options strategy was great, but not scalable, says Mason.

He replaced it with exchange-traded funds, using modern portfolio theory to employ inversely or non-correlated assets in lieu of the option collars.

“So instead of using GE and that option put, I’m using let’s say the S&P 500, which is an asset class which would in some ways correlate strongly with perhaps GE or the Dow. And instead of using the put, I’m going to use an asset class that is inversely correlated or noncorrelated with that asset, the S&P 500 or Dow. So I might use a bond index fund which is going to move in the opposite direction of the S&P 500. If the S&P goes down 10%, I’ve got another asset class that is either going to move up or is not correlated with the S&P to act as that hedge. In other words, it causes my overall portfolio to respond in much the same way that the GE stock and the put [option] would respond.”

To find the right mix of indexes, the algorithm takes into account macroeconomics, Mason says. “We’re looking at interest rates, specifically the spread between short-term and long-term interest rates as an indicator of money supply and whether or not economic conditions are favorable for businesses to borrow and for banks to make money. And to do that they have to loan. … Next we are looking at the earnings of the broad U.S. market, particularly the S&P 500. And we are monitoring that because we should see a correlation between favorable economic conditions relative to money supply and companies’ earnings. In other words, if they can borrow at favorable rates, and banks are incentivized to loan.”

The firm is invested in equities, foreign and domestic and large-cap, mid-cap and small-cap stocks, corporate debt and junk bonds, real estate and commodities. “Then we invest in the U.S. dollar via an ETF. … We might be invested a bit more heavily in consumer discretionary or industrials at one particular time in our equity side, [while] at another time we might still be in equities, but we would be in consumer staples and utilities, for instance.” He calls the style all-asset core tactical.

The offering has taken off, in part because it is now on multiple platforms, including TD Ameritrade and Mid Atlantic’s ModelXChange for the 401(k) marketplace. But one of Cabana’s biggest boosts came from Magellan Financial & Insurance Services two years ago. This insurance intermediary and its sister firm, Foundations, puts insurance agents who want to do more fiduciary-compliant work in touch with third-party asset managers, says Bryon Rice, Magellan’s owner. Some 75 agents on the platform are now using Cabana’s investment solution through Foundations, Rice says, and that represents some $375 million.

“To meet Chadd, to go along with the fact that he is extremely bright, he is extremely passionate about managing money,” says Rice. “The other thing I liked about their process is that [they] have a system. A lot of these money managers are picking their spots. They’ll move to cash. … Cabana has a fundamental foundation to what it is they’re doing. They stick to their algorithm and there is no second-guessing or gut feeling or anything like that.”