Q&A: Bringing Blue-Chip Hedge Funds To Mutual Fund Investors

Nov 18 2011 | 2:52am ET

Altegris Investments characterizes its mission as seeking out best-of-breed alternative managers for its investors—both professional and individual. And it's doing so for a lot of them, with its Managed Futures Strategy Fund recently topping $1 billion in assets.

FINalternatives Senior Reporter Mary Campbell spoke to Jon Sundt, president and CEO of the La Jolla, Calif.-based firm, about the value of mutual funds, why managed futures and global macro strategies succeed during financial crises and why the jump from $100 million to $500 million can be the most difficult in a fund’s lifecycle.

Tell me about Altegris.

Altegris was founded in 2002 with the mission of finding best of breed alternative managers in the world and bringing them to our professional and individual investors. We typically do so in the form of mutual funds, private funds and managed accounts. Many of the private funds that we offer are lower-minimum products than going directly.

For example, one of the managed futures funds we offer is Winton Capital. Typically, their minimum investment is $20 million, but you can invest through the Altegris Winton Fund with low minimums in the thousands of dollars.

In addition, since last September, we’ve been bringing to market actively-managed mutual funds, which are unique in that they access some of the very same managers that previously have only been available through very high minimums and private placements. The Altegris Managed Futures Strategy A is a mutual fund that’s gone from zero to $1 billion in 12 months, because it has exposure to managers that, prior to our mutual fund, were essentially unavailable to the general public.

Was client demand the motivation to begin offering mutual funds?

It was both that and the ability to find world-class managers that were willing to be in a mutual fund format. Five years ago, in the alternative investment world, they wouldn’t talk to you if you wanted to be in a mutual fund.

Then there’s the implementation issue—if you’re an advisor, and you have 100 customers, you have to fill out 100 subscription documents, and you’ve got to mail them to 100 different customers around the world. The mutual funds were so easy, because if you’re on an approved intermediary platform, you can allocate to your customers with the click of a mouse. And you have daily liquidity.

Is it difficult finding managers whose strategies work within the mutual fund structure?

Well, some strategies are just not suitable. But if you look at some really basic strategies, like long/short equity, global macro investing or managed futures—there’s no reason why they can’t be in a mutual fund. For long/short equity, the primary restrictions are leverage and how these managers are compensated. There are various ways to get around that—you work with managers that use less than 2-to-1 leverage—and many managers that had 4- and 5- and 6-to-1 leverage are, since the economic crisis, no longer doing that. Your typical long/short manager doesn’t need to use more than 2-to-1 leverage.

You wrote a commentary on what you termed this year’s “summer shock,” arguing that we can learn from past financial crises because in some ways financial crises are similar. Can you elaborate on that?

Every financial crisis is similar and every financial crisis is different. What you do see typically is a dislocation of some sort and mass flows of capital across asset classes. The question becomes, who is in a position to capitalize on that? Financial crises that happen overnight, I think nobody can predict. But the reactions of the market post-financial crisis, if it’s a single event, tend to be drawn out.

For instance, there was a drama coming into the Lehman Brothers collapse and then an unfolding that came out of Lehman that took place over many, many months. When you have crises that unfold over time, there are mass flows of capital and dislocations, coupled with certain types of strategies that can capitalize on those flows of capital and dislocations. And those flows happen in currencies, in sovereign debt, in worldwide equity markets, and in commodities markets, and if you have a manager who can participate long and short across a broad spectrum—he’s not confined to a single asset class—he can potentially capitalize on that.

You say managed futures and global macro strategies are particularly well placed to capitalize on financial crises. Why is that?

The potential unraveling of Europe—and I’m not predicting it will happen, but it could—would have profound effects on the value of the euro relative to the U.S. dollar. Where is an investor going to get exposure to that? It will have a profound impact on the financial sector. It will have a profound impact, potentially, on sovereign debt. It will have a profound impact on equities markets as they relate to Europe.

Global macro managers and managed futures managers share a common trait: They can trade both long and short the four major asset classes. And they typically participate in these contracts through exchange-traded futures or securities in over 150 global markets.

When you read the papers and you see what’s going on, the large-cap value manager in the U.S. really has nothing to do with what’s going on in Europe, you’re not going to get the diversity there. Nor will the long-only fixed-income manager in the U.S. And global macro and managed futures do.

How do you choose a fund manager? What criteria do you use?

You pore through hundreds and hundreds of track records to find managers that show consistency over time, good risk-adjusted returns with real assets under management and solid risk management systems.

Then you’ve got to verify to make sure the track record is real, you’ve got to make sure the money is really there and they didn’t make all the money on half a million dollars. Then you end up with a pool of talent that you then have to do deep dives on. Who are the people behind this track record? Is there stability in this group of people? Are they deeply talented? How do they make money? Is this a repeatable process over time? And you look at the quality of the organization as it has grown.

How do you find the funds you invest in?

We say no to hundreds more funds than we say yes to, obviously. There are more than 6,000 alternative investment managers out there, depending on your categories, with maybe 5% or 10% that are good.

We have deep relationships with some of the best managers out there, and…success breeds success: If you’re an alternative investment manager and you want distribution in the U.S., to the wealth management community, there are not a lot of firms like us. We have the infrastructure, we understand the legal issues, we understand the compliance issues, we understand the marketing issues, we’re not going to give these guys a bad name and we are going to explain their product thoroughly.

How many managers do you tend to have per vehicle?

We believe that you can be over-diversified. We think that’s the problem with many funds of funds. So, for example, in the Altegris Managed Futures Strategy Fund  we have five to six underlying managers; we don’t believe that we should go to 12. In the global macro we have four to five underlying managers, and they’re all very different. If we came out with additional funds in the long/short space, expect to see three or four or five managers in that fund.

We really have to hold out for high quality. For example, we just introduced the Altegris Futures Evolution Strategy Fund that combines what we believe is the leading managed futures managers in the world, Winton and ISAM, with the star bond fund manager, Jeffrey Gundlach, from DoubleLine Capital. And these managers tend to be more expensive, but we believe talent is worth paying for in the alternative investment community.

But if you have $1 billion to invest and you only put it into five or six managers; does that mean you limit yourself to large funds?

We like to see some size, because we think if the manager doesn’t have a certain amount of capacity, it’s just not a good value proposition. I think anybody with a good track record is going to grow. So we’d rather get someone in the middle of that growth, as opposed to the very beginning, because a lot of problems happen when you go from $100 million to $500 million, we don’t want to be there when those problems happen—I want to be there after he’s hired a chief operating officer, after he’s hired a CFO, after he’s fired the uncle that used to be his administrator.  I like to be on the other side of those decisions. I’ve been on the front of those decisions—I’ve been in this business since ‘86—and I have enjoyed every part of it.


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