For Risk Averse Investors, Defined Outcome Funds May Be The Answer

Mar 19 2015 | 5:52am ET

Last September, New York-based Exceed Investments co-launched a suite of three indexes with the Nasdaq to provide investors with defined exposures to the S&P 500. The three indexes balance downside protection and upside participation which investors can use to achieve their preferred exposure. FINalternatives’ Deirdre Brennan recently spoke with Joseph Halpern, founder and chief executive officer of Exceed, about the growing demand for liquid, risk adjusted investment products, and his firm’s plans to meet this demand. 

Can you tell me a bit about Exceed and the impetus behind the firm?

We formed Exceed Investments to provide defined outcome strategies that allow investors to reshape the risk/return profile of the S&P 500 to match their needs. A ‘defined outcome’ is really just investing with a pre-set protection and return level, which should allow for a more controlled experience.

The S&P is the most popular index in the world, and we’re really looking to reshape that experience for the end user. We’re providing a solution for someone who wants to be invested in the S&P and invested in the market, but is nervous because we are long in the tooth being six years into a bull market…or someone who is conservative and wants to protect themselves because they don’t want to experience the turmoil and potential losses they did in 2008.We also offer a strategy that targets a high degree of enhanced upside participation for investors who want to express a more bullish view on the market.

Is it correct to call these defined outcome products liquid alternatives?

Our products can be considered liquid alts and we compete with two elements in the alts world—one is structured notes and the other is hedge funds.

When you look at strategies to achieve defined outcomes right now, one is to go and buy a structured note from a bank. The benefits of a structured note are the downside protection, which sounds great, but when you get into it, you have to look at the structure, and if it is a credit structure, it is an IOU. When I worked at Lehman, a lot of these notes were principal protected, and the consumer got back 10 or 20 cents on the dollar, so that is not great. They are also not very liquid and thus considered buy-and-hold products.

The first product we are coming out with competes pretty strongly with long/short equity—that is our mutual fund which we will launch in April. Lipper classified us as ‘market neutral,’ meaning we have some level of upside exposure and some level of downside exposure. What it does is it targets, on an annual basis, a floor of -12.5% and exposure up to 15%. This is for a consumer who wants a limited downside and is comfortable with a cap on its upside.

What are your plans to grow the firm?

We partnered with the Nasdaq and about six months ago we launched a family of defined outcome structured indices, which we believe are the first indices of their kind. What we’ve done with the indexes and the mutual funds that will track them, is to take the definition of a defined outcome product and put it into a 40 Act structure. By doing so we’ve created a liquid investment vehicle and have overcome some of the transparency issues that are inherent to structured notes, by standardizing the indices, and basing them on investment grade fixed income products and exchange listed options.

We have one mutual fund coming out in April, and we anticipate launching two additional mutual funds (based on the existing indices) later this year. We have also been granted exemptive relief from the SEC which will allow us to create defined outcome ETFs. It’s possible we’ll be in a position to launch our first ETF by the end of this year or early next year.

Are institutions looking at defined outcome products?

On the institutional side, I’m definitely seeing a trend towards more index and rules based products, and definitely a trend toward transparency. I just saw a report that said the most popular structure this year in the hedge fund universe was a fundamental equity long/short portfolio. When you look at long/short, people are really doing pairs trades…people are getting into [long/short funds] to give them less correlation to the marketplace and also to mitigate risk. Our product is a risk mitigation tool and is being looked at by institutions as an alternate strategy to preserve wealth while still providing upside participation.

How do the fees compare to hedge funds?

The (institutional grade) mutual fund that is coming out in April will have a 1.2% annualized fee, so it compares very favorably to hedge funds. It is priced like a liquid alternative or an ETF. It compares favorably to structured notes where the fees are embedded into the product but can be 2-3% on an annual basis. We believe our fees are fair for a product that uses both options and investment grade securities to achieve a more predictable outcome for investors.

In Depth

PAAMCO: Will Inflation Deflate the Asset Bubble?

Jan 30 2018 | 9:49pm ET

As the U.S. shifts from monetary stimulus to fiscal stimulus, market pricing should...


CFA Institute To Add Computer Science To Exam Curriculum

May 24 2017 | 9:25pm ET

Starting in 2019, financial industry executives sitting for the coveted Chartered...

Guest Contributor

Boost Hedge Fund Marketing ROI By Raising Your ROO

Feb 14 2018 | 9:57pm ET

Tasked with delivering returns on client capital, a common dilemma for many alternative...