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Analyzing a 3-Pronged Approach to Managed Futures

Mallory Horejs, CFA

Mallory Horejs: Hello, my name is Mallory Horejs, and I am alternative investments analyst here at Morningstar. Today with me, I have Bill Marr, president and CEO of Ramius Trading Strategies.

Bill thanks for joining us today.

Bill Marr: My pleasure.

Horejs: Bill, your firm specializes in managed futures strategies, and historically these have only been available to investors through private placement with monthly liquidity. As a manager, have you needed to adjust the strategy at all to accommodate the 40 Act structure?

Marr: You would think, given that this is a strategy that's been available monthly liquidity, higher minimums, K-1, and you take the same strategy and bring it into a daily liquid format with low minimums and 1099. Well, our experience is that we haven't altered it at all. We run private placement products, and we run mutual funds. And we run them exactly the same with the same managers.

Horejs: This has been a big area of growth in the liquid alternatives space. The first fund launched back in 2007, and today we have more than 30 funds. We've seen about three different types of flavors. You have your index-tracking strategies, single-manager strategies, and then the fund of CTAs. Could you discuss those with me and explain the pros and cons of the different approaches?

Marr: Sure. So, the index products, as you mentioned, were first. They tend to track the S&P DTI Index. The advantages are that it's very inexpensive, and the leverage is quite low, so it has to fit a lot of guidelines within asset-allocation models. So, there has been a lot of growth, about half of the assets are from the DTI trackers. The problem is that the performance has not been very good, even over a five-year period of time. The single-manager CTA products that we have are active managers that are dedicated to research, that are innovating, mostly trend-following managers. They are more expensive than the trackers, but less expensive than the multimanager products. And in our space, we're a multimanager, which has its advantages, as well. Obviously, it's going to be more expensive product, but it's able to capture a lot more opportunity sets than either of the other two types of strategies.

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Horejs: Well, let's talk a little bit more about your fund launched last September. Can you tell us a little bit more about the structure, and what kind of managers you're investing in?

Marr: Sure. So the structures are pretty much the same with regard to all of these three different categories. We are allowed up to 25% of the assets to be used for margin purposes. So, 75% or more will always be sitting in a fixed-income portfolio. The product is a multimanager product. There are six managers in the portfolio. There is a portion of trend following. There are other strategies in the portfolio, as well. And as I mentioned, these are managers that we have on our own proprietary managed-account platform. We use these six for the mutual fund, but we have other managers that we're using for private placement, multimanager, and also customized mandates for institutions.

Horejs: That nontrend following element is very interesting. A lot of these strategies rely heavily on that, and momentum is usually the driving force behind a lot of managed futures. What's the advantage of diversifying?

Marr: That's exactly right. I think you only get this through a multimanager product. So, our product, for example, is 75% momentum-based, trend-following, different timeframes. The other strategies tend to be in two different categories. One is a quantitative macro, which we have a portion of that in the portfolio. The difference there is these are all systematic strategies typically for trend following and any type of technical strategy. The input is price--past price, looking for future behavior, future patterns. And the case of systemic macro, it's sort of a GTAA-type of an approach, where the inputs to the models are all fundamentals, things like interest-rate differentials, inflation forecasting, and things like that. So, we have a portion of that.

We also have some short-term systematic managers looking for other types of patterns, other than trend. So, overbought or oversold will be an example of that. When you add 25% of that to the portfolio, which is core trend following, you've reduce the overall level of volatility because they are noncorrelated with each other, the different strategies. And for us what's really important is you reduce the expected drawdown going forward.

Horejs: Well, even though the fund has a relatively short track record so far, I know you've have been investing with external managers for 15 years now. What can investors expect from this kind of a strategy in terms of risk and return?

Marr: I think, what investors can expect is whatever the volatility level is that's described in the product--and if you look at single managers, multimanagers, indexed products, they are all going to be different--in our case, volatility is somewhere between 8% and 10% standard deviation. You can expect that to be consistent, you should expect that to be consistent and predictable over time.

You should be able to expect the correlation over a long full cycle to be close to zero to equities. It will be positively correlated, negatively correlated at times, but the average should be around zero over time.

As far as return, as you know that's the hardest thing to predict. Over a full cycle, it is an absolute-return product. It's not negatively correlated, so when equities do well, who wouldn't expect it to do poorly, but that's the hardest part to predict. I would say, volatility will be consistent; the correlations will be zero over time. And in terms of portfolio construction, we also have a very good sense of what the drawdown would be over a period of time. So, we can predict those types of things, and the variable really is performance.

Horejs: Speaking of performance, the strategy has gotten a lot of attention during the last few years because of its low-correlation diversifying element. But the performance has been maybe a little bit disappointing over the past few years, given what investors have seen over the longer term. Do you have any comments on that?

Marr: Yes, the last two to three years has been difficult for trend following particularly, primarily because we haven't been getting good follow-through in markets and acceleration of trends through markets. Just when we sort of end up in one direction, we have been getting reversals. I think, a lot of it has had to do with government intervention with what's going on in Europe and all the different TARP programs and so forth. And some of this has been flushed out. Obviously, we had elections in Greece, and depending on what happens in Europe, you know, there is a fair amount of momentum to the down side in the euro, right now.

The trends have been pretty good more recently. So, here we are in the middle of June; May was a fantastic month. We got the sell-off in equities. Commodities had peaked out and started to come off pretty aggressively. Fixed income continued to rally, and the dollar has really started to strengthen pretty consistently. And the managers have gotten on top of those trends and gotten on board. The indexes were up pretty much 3%, some even more, for the month of May. But overall, yes, performance has been pretty flattish. But the good news is because May has come, managers have risk on in the sense of full position sizes and are in a position to take advantage of trends that come here going forward.

Horejs: Well, thanks so much for all this insight, and we really appreciate you coming in and talking to us.

Marr: My pleasure. Thank you.