Although markets were jolted by The UK’s vote to leave the European Union, one asset manager says it was a good test for firms, as its quick duration provided managers a stress test for their investments in risk technology and personnel.
Gemini Companies CEO Andrew Rogers says while the industry experienced a brief correction, it is the unanticipated events for which managers must always be prepared.
“Stock market ups and downs don’t really impact us operationally as much, and Brexit, for the most part, was just a very quick correction,” Rogers said in a recent interview with Money Management Executive. “When you see credit events ... that’s where we have to go cross our spectrum of investments in funds to see who was impacted.”
After nearly 16 years with the Hauppauge, N.Y.-based fund company, Rogers says he is more engaged in reducing risk than ever before in anticipation of further market corrections.
What has been your approach as CEO for reducing risk at your firm?
On the client side we call it “administration 2.0,” where in the old days administrators were responsible for calculating the valuation of funds and making sure we were in compliance with the various regulations and financial reporting. That’s much more expansive now with the roles of the board taking greater oversight with the new risk regulations coming out.
We’ve been integrating our services to incorporate much more risk-type reporting. We’ve parted with Staff Pro and SunGuard to come up with various services and products, where on a daily basis people can measure risk within the portfolio using various testing methodologies. We’ve come up with more enhanced reporting, as far as the exposure for derivative type securities, and that’s really become a big part of our program. It really helps the adviser also look at the risk of the maligned portfolio.
We’ve incorporated tools to tackle daily exception reporting. I think the next big step for funds and administrators is really looking at risk. They spoke about having a chief risk officer to report to the board — almost like a CCO for funds that have a derivative exposure — and we think that’s the next big step.
Are you planning on outsourcing your chief risk officer?
Our CCO acts as our chief risk officer. For many years we have had risk meetings on a monthly, and even quarterly, basis to look at the Gemini framework in order to measure our risk and come up with a program to limit risk. The idea of having a risk program for the funds is a relatively new type of idea and we’ve incorporated third-party software to help us measure that risk.
Three years ago we came up with a managed account platform for commodity training advisers where on almost on a shared trust type basis — we can measure risk throughout the day for neutral exposure, cross-hedged, and things of that nature. We can now provide that to mutual funds also since we built infrastructure for that. We use a SunGuard system to measure that risk and we think it’s very robust program. But, even more than that, over the last year on the fund side we’ve also incorporated Staff Pro service. Staff Pro does the things like attribution and contribution type reporting and securities strategies on the sub adviser level; and they give a lot more reporting analytics. They also give risk reporting like barred analysis, and we think it’s a really good program for something like measuring risk. The managed account platform for CTAs was a big part of our program, and now that we can roll that out to mutual funds, it’s pretty exciting for us.
How did your clients respond to the UK’s recent vote to leave the EU?
The managed futures funds, which in our case represents a large part of our business, overall did really excellent during the initial Brexit. We saw the long funds initially take a big reduction. But, it happened so fast. I wouldn’t even call this a “V” type correction. It was so quick that a lot of those characteristics reversed themselves out. That said, managed futures funds, generally, this year have done well. As far as correcting long funds, it corrected very quickly, so I didn’t really see the impact.
It would be much more interesting to see if we had a more extended downturn because a lot of our funds are alternative in nature and tend to be not correlated with the marketplace. This is a tough environment for those funds. I think it’s been a tough environment for all active funds. I would say for them to really show their merit, we need a much longer term downtrend so they can show their value and work in the overall portfolio. But, Brexit was such a quick correction, that I think that for most investors the downturn didn’t even hit their radar. It may not have ever hit their savings. If you think about it, June 24 was around Brexit time, and by June 30 it had already corrected and rebounded. It was like it never happened.
Were there any discussions at your firm about how to handle similar events in the future?
We had discussions internally, but market corrections happen and we internally didn’t think Brexit, from an operational point of view, had much of an impact. So, I think for us it was a non-event.
So, we as an administrator report to boards and things of that nature. It was so quick that it never even made it to the board level because it corrected so quickly.
I remember going back in time to 2008, and then there really was some significant issues in the marketplace. There were so many credit events and there we really did have much more of an impact. I remember when we had these notes that were issued by Lehman Brothers, so we had all these conference calls and issues to go through. All the credit issues from when Lehman was involved and we were so relieved they were guaranteed by AIG. Then of course a week later AIG had their issues.
Stock market ups and downs don’t really impact us operationally as much, and Brexit for the most part was just a very quick correction. But, when you see credit events and things of that nature, that’s where we have to go cross our spectrum of investments in funds to see who was impacted, go the boards, and things of that nature. Even with liquidities there was a big issue for the SEC, and probably a bigger issue for us if something did happen in the fixed income markets.
What do the issues that active managers face translate into the work that you are doing at Gemini?
We’ve had discussions about new funds and products — what’s working and what’s not working — and we almost feel like there’s no middle ground anymore and that if you’re coming out with directionally long funds, you have to come in at a low cost for the most part, unless you have a very compelling story.
On the alternative side, there really isn’t that much fee pressure. Some of the most successful products we’ve seen recently about servicing have been very expensive products, but they’ve performed well.
I would say for active managers, you don’t want to get caught in the middle. You don’t want a plain vanilla product in charge of above-average fees. You either have to be low-cost, or you have to have a compelling story, a non-correlated type fund or something that offers a really niche type product.
I wonder what’s going on in some of these large asset managers who have these very large books of business where they have equity funds and fixed income funds priced around 1%, because they’re kind of caught in the middle. It just seems like there’s not much interest for that.
Do you feel that the market is also responding to the issues that some people feel like Wall Street has regarding transparency?
While I think the term robo adviser is overused, the use of technology, the interaction with your clients and the greater transparency is completely evolving.
Let’s look at our managed account platform. What happens is institutions no longer want to invest in hedge funds because they not only are they expensive but there’s a lack of transparency and lack of liquidity. So, now a large institution that wants to invest hundreds of millions, or $1 billion, into an alternative strategy — not even a registered investment company. They can actually create their own platform, hire the advisers as sub-advisers and they can get aggregate reporting across the whole spectrum of their investments with all the portfolio characteristics.
But this is their money and their platform, so they don’t get any liquidity. They get 100% transparency as frequently as they want. For the larger investors like the institutions, I think you’re seeing this with the hedge funds where basically the fund of hedge funds, and the hedge funds, lack transparency and have fallen by the wayside. Large investors demand the liquidity and the transparency. You are going to continue to see these types of struggles.
On the retail side, there are new platforms, new interactions with the clients, greater transparency — it’s much more electronic — and people want to have access on their phones, and they want it to be relatively simple.
I think everybody is moving there, but there is just a lot of talk about Betterment and WealthFront. At the end of the day we all know that Schwab and Vanguard, for example, can very easily replicate that; and they are.
How does emerging robo technology, or the absorption of that, change distribution or the fund administration?
One key now for these asset managers is to be included in these robo advisers. Even Schwab says the hard part is getting people to use your platform. I don’t know if it’s that complex, but the idea of flowing people to use your platform to do their investments is the most powerful tool. It’s why Schwab OneSource and these other platforms can charge the fees that they do to the asset managers — it’s because they control the flows of money. It’s to the extent that the robo advisers can get traffic to their website and people to use it. By having their tools make it invaluable to the investor, it puts them in that very important part of the industry. What asset managers have to do, from a distribution perspective, is get included in those asset allocation programs in order to get fund flows.
In the old days, people used to invest their funds directly. Then we have the custodial platform and the broker-dealer platforms. Basically everything was sold through third-party intermediaries. You had to pay these third-party intermediaries these fees to gain access to the platforms. Now these large asset managers, or robo advisers, are creating their own platform where they can cut out the intermediaries and become their own third-party intermediaries. It’s a confusing evolving structure of distribution of funds and how people access funds, and it’s definitely putting pressure in some of the firms in the marketplace.
