AlphaSimplex's tactical fund has timely launch with shutdown

It might not have been designed to coincide with last week's federal government shutdown, but the Oct. 1 launch of the ASG Tactical U.S. Market Fund (USMAX) couldn't have been timelier. The fund is the latest and first non-alternative fund from AlphaSimplex Group LLC, a $3 billion asset management firm headed by noted quantitative strategist Andrew Lo. The basic strategy of the fund, which is co-managed by Jerry Chafkin, is to use futures contracts to hedge or leverage the exposure to an underlying stock portfolio that acts as a proxy for the domestic-equity market. “Our objective was to create an equity fund that allowed investors to stay invested for the long term and not suffer through the extreme downturns that sometimes take investors out of the market,” Mr. Chafkin said. Last week when Washington political infighting forced a partial government shutdown, it turned out to be Exhibit A in terms of a case for such a strategy. A selling pattern that started Sept. 30 ahead of the scheduled midnight shutdown triggered enough volatility throughout the week to push the Dow Jones Industrial Average to close below the 15,000 mark for the first time in a month. Even as most financial advisers and professional market analysts were either sitting tight or looking at the sell-off as a buying opportunity, the market panic continued as investors fled out of fear for the worst. “We know that individual investors tend to underperform the indexes because they tend to bail out at the extremes, or they divest because they see something more attractive elsewhere and they chase performance,” Mr. Chafkin said. The fund, which is designed as a core equity allocation, applies the same type of quant investing techniques for which AlphaSimplex has become known. “When it comes to risk, investors are primarily concerned with the risk of loss, so we focus on downside risk as the key risk measure,” Mr. Chafkin said. “The greater the risk of loss, the less exposure we want to the market, and the lower the risk of loss, the more exposure we want to the market.” When risk is high, the strategy employs the use of futures to take an offsetting position, which essentially sells futures as a way of hedging the equity exposure. If the analysis suggests that the risk of loss is low, the fund has the ability to use futures to leverage the underlying portfolio for a total market exposure of up to 130%. “We think this is a very timely product, but we also think it's important to understand it is not just designed to be a short-term nirvana,” Mr. Chafkin said. “We recognize that equity returns are going to be inherently bumpy, and we're not going to be able to avoid every market where stocks lose money, but we're trying to use a risk-based discipline to limit the most extreme declines that tend to be the times when investors lose resolve.”