Mon, 11/09/2017 - 15:32
Mid-October will see Ocean Capital Advisors issue a USD1 billion issuance for their ETN based on their underlying Cayman Island hedge fund, the USA Market Stability Fund.
Ty McGuire, partner at Ocean Capital, explains that he and his partners had observed changes in the active investment industry, coming from the allocators, and driven by the lack of performance in hedge funds and the fact that strong bull markets made hedging an expensive nod to safety.
“Allocators were saying ‘we won’t pay 2 and 20 per cent, not even 1 and 10 per cent’ so there has been massive fee compression as allocators don’t see the value,” McGuire says.
“Then we saw a bigger shift to passive investing, indexing and robo advising, which is a passive algorithm in indexes. Also the growth of the ETF market which has outpaced the growth of any other product in the last five years with its diversity and good fee model.”
McGuire observed that ETF providers were getting more creative in constructing ETFs. “We sat down and talked about these issues and we have created a fund that addresses all these issues encompassing the low fee model, passive indexing, liquidity and hedging all within an ETF.”
The USA Market stability fund was launched June 1st 2017 as the core portfolio of the ETN. The core fund is designed to replicate the long term returns of the S&P500 using a combination of three passive indexes that produce dividends for income, the S&P500, the ICE 20-year Treasury index and the Dow Jones REIT index.
That portfolio is rebalanced every four to six months and then the entire thing is hedged with active hedging strategies based on the old fashioned methods like Black Scholes but with advanced quantitative methods on top.
“Traditional hedging costs money but we have been able to reduce the hedging cost to less than 1 per cent and we can protect the portfolios against much deeper drawdowns,” McGuire says. “Our black box has innovated how you would hedge using derivatives.”
The Stability fund is designed to address allocators’ needs: passive investing; preservation of capital; income production to meet funding demands; reduced volatility, which McGuire says is reduced by up to 90 per cent in the fund with 95 per cent of the drawdown risk hedged out.
The target for the fund is the S&P500’s return which is currently between 8 and 9 per cent a year but without the volatility.
“Since we launched we haven’t had a single down day since June 1st and the S&P has been all over the place,” McGuire says. “The key here is on a daily basis we have the longest run of no down days of any product that has ever been created. Since launch we haven’t had a down day. Although we are following indexes that have down days we have eliminated the volatility.”
He also points that as an ETN product, this fund can be used as a daily intraday product or held on a monthly basis as an overlay or to resize a position. The new ETN is targeted at institutional investors, insurance companies, pension and endowment firms and the fee is 15 basis points.
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