Aptus Capital Founder: Risk Management ‘Key’ To Long Term Success

Jun 10 2013 | 8:04am ET

Aptus is Latin for “ability to adapt or adjust” and veteran hedge fund manager John Romero, the man behind Birmingham, Alabama-based Aptus Capital, clearly possesses it. Romero, who ran Aptus as a $325 million long/short equity fund from 2003 to 2008, has teamed with Cornerstone Investment Management vet John David Gardner and is relaunching his firm as a quant managed futures fund. The Quantematic Managed Futures Program uses pattern recognition and behavioral finance tools to directionally trade metals, grains, softs, bonds, energy, some currencies and indices, on a short-term basis. Romero spent years developing the strategy which returned 13% last year and is up 2.28% year to date through April, according to BarclayHedge data. FINalternatives' senior reporter Mary Campbell contacted Romero recently to discuss the latest incarnation of Aptus.

Why did you decide to return all outside money in the original Aptus fund in 2008?

The primary reasoning was two-fold; concern about the macro environment heading into 2008 thinking we could be down as much as 20% in the S&P 500, and reluctance to sit on AUM for management fees with limited investing opportunities. In addition, I had not taken a break in five years and wanted time to recharge my batteries so thought the timing was as good as any. 

What did you learn running that first fund that you can apply to the new CTA program?

That risk management is the key to any long term success as an alternative asset manager. You win by not losing. This business is pretty simple—if you do not draw down, your investors will stick with you, you will remain close to the high-water mark giving you a chance for incentive profits so everyone wins. On a statistical basis, I had the best risk management in the long/short category for over a three-year period, so this expertise and skill translates very well. 

In addition, liquid capital markets are the same whether they are equities, futures, fixed income, etc.  The same rules apply and that it is not a matter of what you buy but when; meaning timing is everything. Our Quantematic managed futures model is designed with this in mind—our model scans for markets in a low volatility phase and signals us when volatility is on the cusp of short-term expansion, meaning it signals us when prices are about to move, so we are focused on what is actually happening not what we would like to see on a fundamental basis.   

Why switch from long/short equity to managed futures?

Managed Futures is an asset class that is under-owned. It offers so much more value than equity long/short funds, which are highly correlated to the S&P 500. Our program can offer attributes that equity hedge funds can not touch like no correlation, daily transparency and liquidity through managed accounts, ability to notionally fund accounts. And futures markets are global and uncorrelated, far different than the S&P 500 where everything trades in the same direction. 

I would say the managed futures asset class offers an investor an "alternative 2.0" type experience, where the playing field is leveled between the manager and the investor. Lastly, our program also fits well within the managed futures space which is dominated by long-term trend following—our program is short term-based, which means it is differentiated and uncorrelated relative to their other managed futures investments. 

Who is your target investor and what is the capacity of the Quantematic CTA program?

Ideally, high-net-worths, family offices, managed futures allocators or any professional investors looking for something differentiated and liquid. Our capacity is up to $1 billion, so the opportunity is large.

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