Robo advice meets alternative investments

New platform aspires to be an alternatives outsource for financial advisers

Nov 17, 2014 @ 3:54 pm

By Jeff Benjamin

In the latest twist on robo-advice, Insight Advisors in Los Angeles aims to apply automated separate account management to the alternative investments business.

The success of the new platform, which aspires to build customized hedge fund-like portfolios for individual investors, will depend heavily on the ability of founder and lead portfolio manager Michael Tito to convince financial advisers to take a test drive, which could prove even more challenging than putting up solid performance numbers.

“I think the idea is good, but who the hell is this guy?” said Ed Butowsky, managing partner at Chapwood Capital Investment Management.

“What you're delivering is really the key; not the delivery mechanism,” he added. “The value here will be determined by the manager and how close he comes on the deliverables.”

The platform went live last week after more than four years of building a track record with private seed money.

(More: Aspiration's liquid-alts fund takes anti-Wall Street vibe, robo-advice to the next level)

Mr. Tito's bio highlights more than 15 years of hedge fund experience, including stints at the Ivory Capital hedge fund and leader of the hedge fund group at Wilshire Associates.

He is hoping the financial advice community expands its growing curiosity of alternative investments enough to embrace the notion of essentially outsourcing customized portfolios to a platform that does most of its customization over the Internet.

“Our website collects the information on the individual and gets a sense of the financial profile and then creates personalized plan for that investor,” he said.

From several perspectives, the platform appears to be headed in the right direction.

For starters, it takes the pressure off financial advisers to build allocations to alternative investments for their clients. And even though most of the investor profile is constructed in a relatively robotic, online manner, it also promises to build alternative investment portfolios that are unique to each investor.

Mr. Tito can't say it out loud for fear of crossing over some regulatory boundary, but what Insight Advisors is essentially offering is personal hedge funds for individual investors.

For minimums as low as $3,000 for investors under 25, and $10,000 for older investors, Mr. Tito is using all the tools and securities available on most of the popular custodial platforms to manage the alternative portfolios. Account assets stay on the custodial platforms. And volume is not an issue, because the process is primarily quantitatively managed.

Mr. Tito started managing his seed capital in this fashion more than four years ago and now has an actual track record on display on his website. For this, alone, he deserves a certain amount of credit when considering the more common practice of touting back-tested data for new products and strategies.

This year through Oct. 31, Mr. Tito's “representative investor” portfolio gained 5.6%, net of all fees and expenses. That compares with 4.8% by the multialternative mutual fund category as tracked by Morningstar Inc.

Mr. Tito's strategy was up 9.5% last year and 3.4% in 2012. The multialternative fund average last year was 4.2%, and 3.9% in 2012.

Mr. Tito lagged the category averages in 2011 and 2010, when he declined by 9.6% and 9.2%, respectively. Multialernative mutual funds averaged a 2.8% decline in 2011, and a gain of 5.5% in 2010.

Morningstar fund averages are not net of fees, and as investors are quickly learning, performance disparity can be extreme in alternative investing. For example, this year through October, individual fund performance in the multialternative fund category ranged from a 13% gain to a 13.4% decline.

Mr. Tito plans to charge qualified, high-net-worth investors typical hedge fund fees, including a 2% management fee and a 20% performance fee. But in the retail-investor space, where performance fees are prohibited, he will be charging a flat 2% management fee. That compares with a 1.85% average expense ratio for alternative strategy mutual funds.

Todd Rosenbluth, director of mutual fund and ETF research at S&P Capital IQ, called the Insight Advisors platform “the next evolution in these quant-driven strategies,” a.k.a., robo-advice.

He added, however, that with the advice industry still wading its way into the alternatives universe, it might be more difficult for a robo-advice platform to gain traction in an area where investors still need a lot of hand holding.

“That's fine if investors understand it, but without fully understanding the risk and problems that can come with alternatives, it could be problematic,” Mr. Rosenbluth said. “For example, alternatives can be great diversifiers, but they won't perform anything like traditional investments in a bull market.”

While Mr. Tito is trying to leverage the recent popularity of the robo-advice moniker, he insists he is not setting up to compete with financial advisers. In fact, he is banking on building relationships with financial advisers to help them allocate client assets to alternatives.

“We hope to have advisers look to us as a value add-on, not as a competitor,” he said.


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