Monday, 28 July 2014
Last updated 2 days ago
Nov 30 2012 | 1:00pm ET
Managed futures specialist Longboard Asset Management started life as Blackstar Funds, a family office overseeing the assets of the “grandfather of managed futures,” Tom Basso. The firm recently decided to take on outside money, which it is hoping to attract through its newly-launched Longboard Futures Strategy Fund, a mutual fund offering retail investors access to a hedge fund-like, rules-based strategy. Longboard CEO and chief investment officer Cole Wilcox spoke to FINalternatives Senior Reporter Mary Campbell recently about the name change, the new fund and the future of managed futures.
Explain Longboard's recent transformation.
Longboard, the team and the firm have been in existence since 2003, originally as a family office. But if you're going to have client money, Blackstar Funds is a pretty bad name build a brand around. A longboard is a surfboard: It's a tactical tool for surfing waves, and we see our strategy as being a tactical tool for capturing global financial market waves.
We are exclusively focused on managed futures in the mutual fund space. The team here has predominantly done managed futures our entire career. Our pedigree is really in doing due diligence on pretty much every managed futures hedge fund on the planet.
In parallel, we have a computer science background, so we have the ability to collect our own data and ask our own questions. We've published more work than anyone in the industry on the subject of trend-following as applied to equities, and now we come full-circle to expand to a more traditional managed futures fund—currencies, commodities, equities and interest rates—but exclusively in the vehicle of a mutual fund, because we are not focused on institutional investors. We're not going head-to-head with Winton Capital Management, BlueCrest Capital Management's BlueTrend or Man Group's AHL strategy for customers. We're focusing on the need for retail investors to have the same access and benefits of an authentic, active alpha managed futures strategy inside the vehicle they need, which is a mutual fund.
Does Longboard invest in commodity trading advisers?
No, we run all of our own proprietary strategies. Most mutual funds are allocating to other CTAs; our fund is unique in that it actually has direct access to the underlying strategies.
Our core focus is to provide the most efficient direct access to an active alpha, managed futures, pure trend-following strategy. We don't have multiple models, counter-trend, mean reversion. We have an intense bias towards ultra-long-term, pure trend-following as an investment style as well, as something that is diversified across every tradable instrument that you could possibly find on the planet.
What kind of selection process do you use to narrow down that universe?
The process is rules-driven and disciplined. It's not a discretionary strategy, so it's very price-driven. We look at capturing and identifying price trends on the long side as well as the short side. The way we go about it is to start with having a long-term perspective.
If we looked at 18 months of closing prices in a market and today's price exceeds all of the prices over the last 18 months, we would establish a long position in that market; if the opposite were true, we would establish a short position. And if today's price was at the 50th percentile or just at the median average price over that 18-month window, we would punt and have no position in that market.
If you buy breakouts on the upside and sell breakouts on the downside, effectively half the trades revert back to being average and you lose a little bit of money, then the other half go on to have price persistence. But there's asymmetry in the winners and losers, because the price-persistent winning trades turn out to be three or four times larger in terms of the magnitude of profit relative to the amount of loss that you take on the other half when you exit the position as a false positive that reverted back to the mean and didn't have any price persistence.
How long do you tend to hold a position?
Our average hold time is about one year. Over longer durations, persistent directional cyclical trends routinely occur, and this longer duration strategy does a very robust and effective job of capturing those movements, whether it's 100 years ago or today.
When you're looking at data sets, you don't find that this ultra-long-term perspective decays from one decade to the next. What I'm very concerned with, what hurts trend-following strategies, is directionless or whipsaw volatility. And when you have a long-duration strategy where you're not making a lot of wholesale changes to the position direction you avoid the risk associated with constantly getting whipsawed and chewed up in those directionless volatility environments.
How many positions do you hold on average and what is the division between long and short?
On average, we're long about a third of the time and flat about a third of the time and short about a third of the time. So, if we have 100 some-odd markets in our universe, we tend to be engaged in about 50 to 60 of them at any given time and they tend to sort of equal out.
What are your current assets under management in the fund?
The assets under management are $40 million and, actually, the mutual fund just went live recently. Our goal is to have the fund at $300 million by the end of 2013, and we have a pretty sizeable active direct-marketing sales force involved in that. The strategy, without any changes, has multiple billions of capacity associated with it because of its ultra-long-duration approach.
Managed futures have not performed particularly well in recent months and yet institutional investors are growing more interested in them. Could you comment on that seeming contradiction?
You're hearing the twice-a-decade, death-of-trend-following saber rattling. I actually just read an article yesterday that asked, "Is trend-following dead?" But trend-following is similar to farming: You have a couple of conditions that you need to have good yield—good weather at the right time and rain—and that will yield a good harvest. If you have a drought and bad weather at the wrong times, crop yields are going to be low.
The same is true of trend-following. If you have global asset class directionless volatility, it's the equivalent of very poor growing conditions. However, in drought years, they don't say it's the death of farming, they say it was a bad year.
Trend-following is a misunderstood category as far as what the root return drivers are. Where do they come from? It's solely a function of having directional movement in markets or not, and we've had a worse-than-normal environment with more directionless volatility across everything with the exception of fixed income over the last 12 months. That has led to below-mean returns for trend-following strategies and it's no more complicated than that.
So the question is, going forward, are directional movements going to return to global markets or not? If we're in a period of long-term stasis where prices go sideways and choppy and don't really go one way or the other, you're saying that price-risk doesn't really exist. If that's true, we don't really need markets for risk transfer to exist.
I'm highly confident that as we have seen since the beginning of public markets, you're going to see long-term, directional price trends. I think the short-term volatility along the way can have all kinds of variants associated with it, which is specifically why we think that this ultra-long-term approach sidesteps the risk associated with overly trading during environmental periods of time that are leading to lots of short-term volatility.
Any particular markets where you see opportunities today?
We haven't really seen any significant changes as far as what the portfolio has looked like. We've had a persistent general trending in long fixed-income around the world, so short interest rates are going down. We're still established in that position. Our biggest allocation as far as active risk is long fixed-income. The second-largest allocation is long grains; we've had this big move and the trend that happened over the summer with the drought, we're still engaged on long soybeans, wheat and things like that.
On the flip-side of that, I can tell you what we see as very abnormal relative to average things you've seen over decades is in our currency exposures, so trades that we're actively engaged in are either long or short in currencies. It's very, very low today. It's the lowest amount of active allocation where we have signals to be either long or short even though the number of currency rates actually represent a big portion of our potential opportunity set, so we're saying currencies have been incredibly choppy and have not led to us getting actively engaged either long or short in any substantial kind of degree.
The only trades that we have on are long the Australian dollar against the U.S. dollar, short the euro against the U.S. dollar and long the U.S. dollar index. We saw a choppy environment for our entire currency sector for the last few years and that is another reason why you've seen below-mean returns for the asset class because that tends to be a very, very large part of any managed futures portfolio manager's opportunity set around the world.
What role do you see managed futures playing in the average investor's portfolio?
We view managed futures as an asset class that should be a core, strategic allocation to be mixed in with other, more traditional things. So if you have a 60/40 stock/bond portfolio, managed futures adds incredible diversification benefits to that portfolio because it has produced as a divergent strategy, meaning something that tends to do very well during times of large directional dislocation either on the up side or the downside.
Our white paper, The Case for Managed Futures, suggests a minimum of 25% allocation to diversified managed futures portfolio is what a prudent diversified portfolio should be targeting.
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