BY: MARK NOBLE, SENIOR VICE-PRESIDENT, ETF STRATEGY, HORIZONS ETFS
Calgary is well-known as a leader for oil and gas investing, but it’s one of the city’s independent asset managers that is starting to turn heads on both sides of the Canada/U.S. border.
The global hedge fund industry has received a bad rap in recent years due to its underperformance compared to a raging equity market. For example, the Credit Suisse Hedge Fund Index had a negative return of -0.57% in 2016, during a year of strong returns for most other major asset classes.
One exception is the Calgary-based Auspice Capital Advisors. This company is quickly building a reputation among hedge fund managers in North America, as its returns continue to outshine many of the largest hedge funds in the world. The firm was founded by Tim Pickering, a former Shell and TD Bank trader who takes a very innovative and relationship-oriented approach to being an asset manager.
Auspice Capital provides rules-based investment strategies, offering both actively managed hedge funds and index strategies, available in variety of structures, including ETFs. This category of hedge funds, often called “managed futures”, is also commonly referred to as CTA (commodity trading advisors) strategies, due to the licensing requirements in the U.S. to trade derivatives and futures contracts. It is also one of the largest global hedge fund sub-set strategies. The approach used by CTAs can vary dramatically, but many use a quantitative rules-based trend-following strategy, where they can go both long and short on futures contracts of dozens of different types of investments and across all asset classes.
CTA strategies represent approximately $340 billion USD of global assets1. Within that category are some of the largest hedge funds in the world, including AQR, Winton (Altegris Evolution), Campbell and Bridgewater. For several years, Auspice’s Managed Futures Index strategy (AMFERI:BLOOMBERG) has beat them all, with better risk-adjusted returns.
1Source: BarclayHedge, December 4, 2016.
Source: Bloomberg, as at January 31, 2017.
The indicated Index and ETF rates of return are the historical annual compounded total returns including changes in per unit value and reinvestment of all dividends or distributions and do not take into account sales, redemption, distribution, transaction or optional charges or income taxes payable by any security holder that would have reduced returns. The rates of return shown in the table are not intended to reflect future values of the Indices or of the ETFs or returns on investment in the indices or the ETFs. The indices are not directly investable and the cost of replicating them is not contemplated on the returns shown.
* The returns shown for the AMFERI Index include hypothetical back-tested data for the period from January 01, 2000 to November 30, 2010.
Absolute Returns
One of the key features of a good hedge fund is absolute returns. The genesis of the industry was to attain positive, or at least relative positive returns through an entire market cycle, and that’s been the hallmark of Auspice’s strategy. The Auspice Managed Futures Index strategy has delivered positive absolute returns over every multi-year period since its inception.
True Diversification
During this latest bull market in equities (which is already one of the longest in history), many investor portfolios have abandoned a key tenant of portfolio management – diversification. The growth of the CTA industry and its $340 billion USD in assets has been a result of the fact that managed futures, on average, tend to generate what are referred to as non-correlated returns. This means the returns of managed futures do not follow the returns of stocks and bonds or any other asset class. Instead, outperformance is generated at different periods in the market. Most notably, managed futures historically generate positive returns when stocks and bonds have been historically impaired, something that is referred to as “crisis alpha”.
Last year was a difficult year for most CTA strategies, with the benchmark Barclay BTOP50 Index down 4.4%. Auspice, which utilizes a more dynamic and risk-focused approach than the vast majority of these strategies, delivered higher returns adding to its peer outperformance at critical times (e.g. 2008 crisis/2010/2014). This is a significant potential advantage, because the strategy is providing crucial risk/return benefits while minimizing the negative return drag on total portfolio performance.
As you can see in the chart below, the AMFERI strategy has historically delivered the crucial crisis alpha, but more importantly it has delivered positive returns in all key market environments since its inception.
Source: Auspice Capital, as at December 31, 2016. The indicated rates of return are the historical annual compounded total returns including changes in per unit value and reinvestment of all dividends or distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any securityholder that would have reduced returns. The rates of return shown in the table are not intended to reflect future values of the Indices or returns on investment in the Indices. The Indices are not directly investable.
* The returns shown for the AMFERI Index include hypothetical back-tested data for the period from January 01, 2000 to November 30, 2010.
Easy to Access
Auspice Capital has also been a leader in embracing the rise of so called “liquid alternative’ strategies. For example, the AMFERI index strategy can be accessed in Canada through the Horizons Auspice Managed Futures Index ETF (HMF).
This strategy has some key advantages. First, it’s an open-ended ETF that trades on an exchange, so it’s liquid and can be sold anytime during the business day. It’s also open to investors of all account sizes and does not require investor accreditation to purchase.
The chart below shows the risk/return of both the ETF and the Index compare favourably to the absolute return profile of stocks and bonds, but do so with non-correlation (i.e. true diversification).
Horizons Auspice Managed Futures Index ETF Comparison Chart
| Ticker | 1 Month | 3 Month | 6 Month | YTD | 1 Year | 3 Year | Since Inception* |
|
| Horizons Auspice Managed Futures Index ETF |
HMF | -1.68% | -5.33% | -5.59% | -7.25% | -8.09% | 2.03% | -0.81% |
| Auspice Managed Futures Excess Return Index |
AMFERI | -1.48% | -4.95% | -4.97% | -6.97% | -5.52% | 2.65% | -0.03% |
| Barclay BTOP 50 Index | BARCBTOP | 0.00% | -1.03% | -5.59% | -1.03% | -10.49% | 1.99% | 0.85% |
| S&P Diversified Trends Indicator Total Return Index |
SPDTT | 0.23% | -0.96% | 2.77% | -1.86% | -0.98% | 1.72% | -0.15% |
| S&P 500® Index (Total Return) |
SPXT | 3.97% | 8.08% | 10.01% | 5.94% | 24.98% | 10.62% | 13.35% |
| S&P/TSX 60™ Index (Total Return) |
TX60AR | -0.07% | 2.81% | 8.09% | 1.16% | 23.74% | 6.84% | 8.18% |
As at February 28, 2017.
The indicated Index and ETF rates of return are the historical annual compounded total returns including changes in per unit value and reinvestment of all dividends or distributions and do not take into account sales, redemption, distribution, transaction or optional charges or income taxes payable by any security holder that would have reduced returns. The rates of return shown in the table are not intended to reflect future values of the Indices or of the ETFs or returns on investment in the indices or the ETFs. The indices are not directly investable and the cost of replicating them is not contemplated on the returns shown.
Three Key Benefits of Auspice Capital’s Strategy:
1) Absolute returns
2) True diversification: Non-correlation (not negative) to stocks, bonds and volatility
3) Crisis alpha during periods of heightened volatility
In recent years, Auspice has continued to partner with brand name retail distributors in the U.S. and Canada, as well as institutional investors (such as public pensions). Their innovative streak has not slowed down, recently launching an ETF providing investors with the only non-wholesale access to the Canadian crude oil marketplace. They partnered with the respected U.S. Commodity Funds group (owner of USO) to launch the ETF in the U.S. in 2017.
At Horizons ETFs, we anticipate that Auspice Capital will continue to attract inflows as the firm becomes more publicly known and for continuing to beat the CTA industry with a better risk/ return profile, including significantly lower downside. The strategy is providing an absolute return profile – generating positive returns during periods of rising volatility – true diversification, when you want it.
The views/opinions expressed herein may not necessarily be the views of AlphaPro Management Inc. All comments, opinions and views expressed are of a general nature and should not be considered as advice to purchase or to sell mentioned securities. Before making any investment decision, please consult your investment advisor or advisors. The manager and the sub advisor have a direct interest in the management fees of the ETFs, and may, at any given time, have a direct or indirect interest in the ETFs or their holdings.
Certain statements may constitute a forward looking statement, including those identified by the expression “expect” and similar expressions (including grammatical variations thereof). The forward-looking statements are not historical facts but reflect the author’s current expectations regarding future results or events. These forward-looking statements are subject to a number of risks and uncertainties that could cause actual results or events to differ materially from current expectations. These and other factors should be considered carefully and readers should not place undue reliance on such forward looking statements. These forward-looking statements are made as of the date hereof and the authors do not undertake to update any forward-looking statement that is contained herein, whether as a result of new information, future events or otherwise, unless required by applicable law.