- The Covid Rollercoaster may have cut complex volatility trades beloved by the smart money, but a New York mutual fund has emerged as a $540 million winner with a back-to-basic strategy.
After a 4% gain in 2013 for its traditional investment style, ABRABR Dynamic Funds LLC is in fighting form thanks to the strength of retail demand for stock strategies that cushion market corrections. Over the past year, assets under management have increased thanks to inflows and trading returns from $100 million to $640 million.
Trading a handful of securities in parallel to the S&P 500 and Cboe Volatility Index, the firm charts asset trends using quantitative methods. For Taylor Lukof, who founded Money Manager in 2010 the relatively simple approach paid off last year when markets whipsawed between panic and jubilation.
Investor behavior is irrational and that can create opportunities for volatile trends at the extremes, said Lukof, who previously co-managed equity derivative strategies at Toro Trading. It is a lot that goes into the model, but the output is very simple.
After reducing CEOcount in recent months, ABR is expanding to a new location of 5,000 square foot in downtown Manhattan and as the broader asset management industry reduces its real estate footprint.
While the complex volatility platforms are closing a number of pandemic strategies, returns into exchange-traded products are being launched, and new funds include the likes of Simplify Asset Management and a team backed by Bitcoin billionaire Mike Novogratz. Defensive stock strategies that use derivatives are also in demand, with ETFs that offer protection in drawdowns and bill billions over the past year.
ABR's trend-following model sets up equity exposure and tilts down Bets on Volatility when benchmarks are rallying and the swings in stock prices are falling. In upturns it does the opposite.
In August the firm launched its flagship 75 25 volatility fund to surf both bullish and bearish regimes. Some 75% is allocated to the S&P 500 and long VIX exposure that tend to outperform in equity selloffs. The remaining 25% is shorter hedge with Treasuries as a money buy-in.
The approach seems to work. The ABR 50-50 Volatility Fund has posted some of the best gains among managed Futures strategies for the past three years, data from Bloomberg show.
Yet, as with any momentum strategy, market regime changes can be a money loser. The ABR funds experience bigger swings than their peers, and at the start of the Covid selloff, the 50-50 funds dropped 15% in a week.
"You have to admit that you're going to make a sacrifice in a correction and that is what is uncomfortable for most investors, especially with volatility strategies", said Lukof.