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Beauty in diversity.

Superfund has been keen to show the world that managed futures funds are an asset class worthy of their money. According to Van Leeuwen, the global financial crisis seems to have obliged them with the opportunity. Van Leeuwen said, "It has given us the chance to show investors that our strategy does work. It is human nature to want to see before you believe. <p>"Our strategy is like a cushion for portfolios during weaker economic times. It is just an investment fund, but it is so well diversified over one hundred different financial and commodity markets. We also diversify the portfolio by having asset classes within the portfolio which are non-correlated. When gold goes up, for example, coffee doesn't need to go up -- they both go their own way. If your portfolio consists of the same sector such as equities you will have problems -- I haven't seen one equities fund have a positive result in 2008, even though equity funds have the best asset managers and the most diversified portfolios. When these funds went down we went up. So if you have lost 50 per cent on equities, but gain, on average, 50 per cent with a fund like ours then you have balanced out the risk in your portfolio.<p>Markus Buechel, President of Superfund, stressed the importance of investing across a range of assets with the lowest correlation to each other: "last year, it was very important to show non-correlation to all the other asset classes. There is almost no correlation to our strategy and the commodity world and there was a negative correlation to the stock markets which helps to diversify our portfolio and protect against the crisis."<p>Superfund believes that it is common sense not to put all of your eggs in one basket, and that the key to a balanced investment portfolio is true diversification across many different markets, which behave as independently from each other as possible. Combining different investments from the same asset class, for example five different stock bonds, is not true diversification. They cited packing for a holiday as an example: if you packed five different tee-shirts to wear, and then it rained all week you would be cold and miserable -- you need to account for every eventuality. You need a raincoat, a tee-shirt and a jumper. According to Superfund, in order to protect against financial weather in investing, it's just as easy -- an ideal portfolio should be filled with non correlated asset classes. <p>The example Superfund used was for a client heavily invested in stocks: technology stocks; blue chip stocks and pharmaceutical stocks. The client may think that they have a well diversified portfolio, but if the stock market crashed their entire portfolio would also crash, because stocks are highly correlated to each other, and tend to move in the same direction regardless of industry sector or even countries. Superfund demonstrated this by looking at crude oil and the airline industry: if the price of jet fuel rockets, ticket prices will have to go up too and because the volume of passengers travelling falls as a result, the prices of airline stock will also go down. Superfund believes that a truly diversified portfolio must consist of different asset classes which move independently from each other, or which have the lowest possible correlation. Fluctuations in the price of gold, for example, will have little bearing on the price of wheat.<p>Superfund claims that they achieve this diversification by investing in over one hundred different local markets and asset classes, from coffee beans to currency, as well as stock indices. However, Superfund explained that some people believe that higher returns can only be achieved with higher risk. Though they admit that this may be true in a traditional portfolio, they explained that in 1952 Harry Markowitz developed the theory of portfolio choice which proved that adding non-correlated assets which move independently from each other to a portfolio increases profit potential and reduces risk. This theory won Markowitz the Nobel Prize for Economics in 1990. Now, the next generation of Superfund funds goes one step beyond that theory, by combining not only different asset classes but investment strategies as well.<p>Leeuwen is assured that in these challenging times, investors have not been scared off by the fund's complexity. He said, "Everything is explained to our investors -- we are very focused on being transparent. We see the benefit of being transparent. Our clients receive monthly management reports which explain our positions fully. We do not want to be seen as a product pusher, which is why our sales teams are financial educators. We would rather share the knowledge we have as financial experts than push products." <p>Education is big theme as those investing in Superfund may not be the High Net Worth, stock savvy investors that one might expect. Leeuwen explained, "We are among the first to make this asset class available to private investors. People can invest for as little as $5000, which is very unique. Typically, to invest in an asset class as well diversified as this, you would need at least $1 million. You would need a lot more to be able to maintain the fund." <p>Leeuwen also said that investors can take comfort in the funds' liquidity: "the fund is very liquid, which is comforting for investors. If you invest in something like real estate then the money goes into the property and you have to sell the property before you can get the cash. Out investment funds make use of futures -- some use of stocks, some use of bonds -- which is an agreement to settle the price difference. Because a future is just an agreement, only a little amount is blocked on the client's account, and so their money can still earn interest and you are very liquid and very secure." <p>Buechel said, "For the individual investor we offer monthly liquidity, and for the institutional we offer weekly, which is also very unique, especially in these times.<p>"You have probably heard a lot of stories about alternative fund managers who have extended their monthly liquidity to quarterly, or have even closed the fund altogether, but our fund is liquid by nature so we do not have that problem."<p>Buechel explained that technology has always been a driving factor in Superfund. He said, "In 1992 when our two founders got together, they started developing software to extract data from the television, which was free of charge, and export it onto a computer to do an analysis -- out of that idea they developed the software; we have always been driven by technology."<p>Leeuwen explained that computers can take away the nerves that shake the markets. He said, "There is a fully automated system that monitors the markets 24/7. It can react immediately to market changes and it also has the advantage of cutting out human emotions. People can get very emotional about buying shares -- they see shares in magazines and on the news. If the stock goes down they can be hesitant to cut out straightaway. People buy emotionally without much thought behind it. Superfund allows you access to the local market and follows the best trend in the market."<p>Superfund works on the principle that digital decision making is rapidly replacing human intuition. They explained that today's markets are managed by fully automated trading systems which can simultaneously process vast amounts of data from hundreds of different sources from around the world. Computers can simultaneously trade a wide range of everyday goods in over one hundred different exchanges around the world. Fully automated trading systems make every trade without relying on intuition, personal experience or just plain luck. Computers rule out the negative effects that trading with human emotions can have on trading decisions. As a result, computers can make split second decisions by sticking to a disciplined set of rules, and make higher profits with less risk as a result.<p>Leeuwen explained that the fact markets are driven by a herd instinct is also an intrinsic part of human nature that a computer can bypass. He said, "Certain asset classes sound very safe, but they branch into other asset classes. For example, bonds: where does the interest come from? Are they buying assets in infrastructure or property? And how liquid can it be? What if the investors really need their money and they start selling, what are they going to do -- chop up the road and sell it in pieces? And who will buy it? People always ask what should they buy -- what the golden ticket is -- and the most important thing is to understand why markets move up or down. The only reason markets move up or down is because there are more sellers than buyers or buyers than sellers.<p>"People are crowd followers by nature. This herd instinct is also true of financial markets. Financial markets are also driven by human emotion -- greed, fear and hope -- which all influence trading. The decisions to buy and sell are often made by traders in a fraction of a second, and under very stressful conditions. Following the majority decision is often much easier than going it alone. If one trader is dumping large amounts of stock, others tend to assume the stock is sinking, and will often abandon ship, giving rise to a downward trend. And it works exactly the same in the opposite direction: if one trader starts buying vast amounts of one stock, others will follow, and an upward trend takes hold. <p>"Emotional patterns like these are key to trend following strategies. Traditional investment funds try to predict future prices by using fundamental data such as research papers or company reports. They buy and sell based on these predictions, which triggers trends in one direction or another. Trend following systems just analyse historical market data and current market movements to identify new trends as they develop. Trend followers wait for the right opportunity to enter the market -- just as the trend is starting. This trend may last for minutes, days, weeks, months or even years. In this way, attractive and well defined trends can be exploited to generate profits. As the saying goes, cut losses and let the funds run. This is key to our strategy -- we don't want to predict markets, we only want to follow their behaviour." <p>Leeuwen explained that Superfund funds are also recognised by an absolute return strategy: traditional investment funds generally measure their performance against a benchmark. This benchmark is a comparison value and is usually indexed in the sector being traded. For an equity fund which trades US dollars the Dow Jones average could serve as its benchmark. Suppose the Dow Jones loses 20 per cent, while the equity fund only loses 15 per cent. The fund manager will take credit for this five per cent difference because he seemed to have outperformed the benchmark. The success of this fund is measured by its relative performance. While the fund has technically outperformed its benchmark, investors are still stuck with a loss of 15 per cent. <p>They explained that in contrast, systematically managed funds are measured by their absolute return, or above zero return, which the fund generates for its investors, regardless of how the market performs. History has repeatedly shown that financial markets are not a one-way street, which is why investors need a fund that can generate positive returns in both rising and falling markets. In the same way you cannot parallel park a car using just forward gears -- you have to be able to move in both directions, using forward and reverse gears. While stocks and equity markets work by only moving in one direction -- upwards, managed futures funds have the flexibility to generate funds in both rising and falling markets. Because systematically traded funds follow strict rules on how to react to market movements, profits are allowed to run and profits are quickly and efficiently cut short, whatever the direction on the markets.<p>Leeuwen concluded that managed funds are given their chance to really shine in challenging times such as these. He said, "Absolute return funds can benefit in the worst economic climates, like last year. The year 2008 was a good year, when we outperformed all the markets. Of course, we are not a savings account, but an investment fund which has positive months and negative months. The nice thing is that we recover so quickly that investors can benefit during negative months. To buy a fund just on past performance can be a risk for an investor. You should invest in a fund not only because of its performance, but for its skills."<p>2009 CPI Financial. All rights reserved.

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Publication:Banker Middle East
Date:Jun 29, 2009
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