A.J. D'Asaro: Hi, this is A.J. D'Asaro for Morningstar, and today's focus is managed futures funds.
Joining me today is special guest Mike Harris, president of , one of the leading managed futures hedge funds, and who has recently launched a product under the name Equinox Campbell Strategy in the mutual fund space. Mike thanks for joining us.
Mike Harris: Thanks for having me.
D'Asaro: Mike, for the uninitiated here, what is a managed futures fund?
Harris: A managed futures fund is a liquid alternative investment that really helps to smooth the ride in the portfolio because of the uncorrelated nature of the returns, particularly to traditional assets like stocks and bonds.
Oftentimes we tell people that some of the benefits of managed futures is that it's actively managed, which means it doesn't have a bias to be long-only like many products in investors' portfolios. It can effectively make money in both rising and falling markets from its ability to be both long and short. Oftentimes it's traded in a systematic fashion. So, we're using models to trade the markets, and we're using science and data to back-test those returns.
And I think, probably one of the biggest benefits is that it truly is both global as well as trading all four of the major asset classes. So, in addition to stocks and bonds, most managed futures funds, including the Campbell strategy fund, also access both the currency and the commodity markets, which really gives true diversity to an investor's portfolio.
D'Asaro: So managed futures funds trade many asset classes systematically. I feel that the systematic part is something that investors aren't very familiar with. Can you expand on what the difference is to be a systematic fund versus something investors might be used to?
Harris: Most investors are probably more used to the discretionary approach, where human beings, portfolio managers, make decisions around the markets they are going to trade and things like timing.
Systematic funds that many managed future strategies use is much more of a quantitative-based approach, where you start with an intuitive investment thesis in looking at the markets, but then you use science to effectively take the data and find a reliable and a repeatable way to trade those markets over and over again.
Some of the benefits of doing it systematically: number one, you are taking the human emotions out of trading. One of the downsides of discretionary trading is that oftentimes even the best traders take profit too soon in a move and oftentimes let their losers run a little too far without effective risk management in getting out of those trades.
A systematic rule-based approach has a set of rules, and it follows them. As I said, because it's repeatable, you are able to run these strategies over and over again across a large number of markets. When I think about folks that trade fundamentally, in order to be an expert in, say, the coffee market, you've got to do a lot of trips to Brazil and do a lot of market research, which means, at the end of the day, maybe you are only able to trade a few markets on the discretionary side.
In a systematic approach, you are able to trade hundreds of markets, because one of the main alpha sources, which is momentum, we see that across a host of markets, so it truly gives you the diversity that you are looking for in a portfolio.
D'Asaro: Let's talk about momentum. To what extent does that play a role in generating alpha in your portfolio, and how strong of a factor is momentum really?
Harris: It's a great question. Momentum or trend-following is probably the most dominant alpha source that we see in the managed futures space. In fact in the Equinox Campbell Strategy Fund, it represents about 80% of the strategies that we are running.
Now, interestingly enough, we are running across three different look-backs or time horizons in the momentum space. We have several different unique forms of trend-following. But when you think about momentum, it largely is just representing that as information is disseminated over different period of times, and investors in the marketplace are making decisions for different reasons--think about hedgers, speculators, and investors making very different decisions in the marketplace. We see that markets over time tend to trend in one direction or the other, meaning to the upside or to the downside. And these systematic approaches effectively can not only detect momentum based on the look-back or time horizon, but then also express those positions, and then have the conviction to stay in the trade as the market continues to move higher or lower.
D'Asaro: One of the things we see in mutual funds is performance-chasing. Investors follow asset classes that have had the greatest performance. Is that a reason for the momentum effect to persist?
Harris: I think that certainly is one element, but when I think about momentum, it's certainly not performance-chasing. Momentum is a long-term strategy, so it's one that you want to enter into and stick it out on the long haul. In fact, many of the large global-macro trends that our models pick up on are not short-term trends that happen in a matter of days. In large part, I think that many the trend followers in the managed futures community are more medium to longer term in their look-back. So, that's probably averaging somewhere between one and 12 months, which is certainly not short-term, so you want to be careful not to chase returns, whether it's markets or funds.
D'Asaro: Mike, I understand you also have another 20% of your portfolio in non-trend or non-momentum-following strategies. How does that make a Campbell Strategy different?
Harris: I think one of things that's unique about the Equinox Campbell Strategy Fund is that, here, we're actually taking our entire hedge fund portfolio and putting it into a '40 Act mutual fund vehicle for investors in the mutual fund space to access. That means that they're getting not only access to all of our trend-following models--in addition to those three important look-backs, short-term, medium and long-term--but in addition to that, they're also getting a 20% allocation to our lowly-correlated non-trend-following portfolio, and that includes alpha sources like enhanced carry, cross-sector models, as well as short-term mean reversion. These are all strategies that help modulate the portfolio during periods where maybe the markets aren't experiencing medium- to long-term macro trends. So, it gives really kind of an all-weather approach, if you will, to the portfolio.
D'Asaro: So in the managed futures category there seems to be two types of funds--one is the more simple, trend-following momentum fund that tends to charge a lower expense ratio and give you the beta of managed futures.
Then you have funds like Equinox Campbell Strategy, which charges a higher price because it has access to the Campbell hedge fund strategy in its undiluted form.
What do you think the benefits are to an investor to go with a higher-priced strategy such as yourself?
Harris: Well, I think there's not a one-size-fits-all when it comes to managed futures, and I think to your point, there are some investors that either have investment mandate or a bias to always pick the cheapest product coming off the shelf. There are probably some very good trend-following strategies out there that you can access.
As I mentioned, though, I think there are periods of time--and we've seen them over the last few years in particular with an increase in central bank intervention--where we haven't seen the same medium- to long-term macro trends persisting in the marketplace. So having a really robust portfolio with multiple forms of alpha is going to be that all-weather approach that hopefully can make profits in all different types of environments and won't just be there for what I'll call "crisis alpha." … A lot of investors will put simple trend following into their portfolio in the hopes that when there's an equity market correction, as an example, managed futures historically have shown good periods of profitability because of its ability to go short the equity markets and provide a bit of a hedge in the portfolio. And I think that some of those lower-cost trend following approaches will, in fact, provide that. But those corrections in the equity markets, as we've seen in recent years, they don't happen all the time. So you have to think about some of those years where the markets aren't going down. And does the portfolio have a robust enough set of alpha strategies in order to truly help the portfolio and the client in all environments?