The investment community appears to be catching on to the idea behind the
Rydex Managed Futures Strategy (RYMFX), a first-of-its-kind registered mutual fund that provides synthetic exposure to the futures markets.
The fund, which was launched in March 2007, has grown to $375 million, $100 million of which has come into the fund since the start of the year.
The immediate appeal is the fund's performance, which stands out as solid evidence of its touted non-correlation to traditional stock and bond portfolios.
Through last Thursday, the fund was up 5% for the year to date, compared with a 6.8% decline by the Standard & Poor's 500 stock index.
During the 10 months that the fund was available last year, it gained 7%, while the S&P 500 rose 4.6%.
The story behind the fund's launch by Rydex Investments of Rockville, Md., is almost as unique as the fund itself.
While not officially marketed as a passive index fund, it is designed to track the Standard & Poor's Diversified Trends Indicator (S&P DTI), an investment model created in 1999 to capitalize on momentum in the commodity and financial futures markets.
The index is essentially an algorithmic formula designed to capture intermediate trends by analyzing the seven-month moving averages of 14 underlying commodity and currency categories and determining whether to go long or short on the categories.
"The DTI is a very conservative approach to futures, and it is designed to act as a non-correlated hedge to traditional stocks and bonds," said Victor Sperandeo, who created the DTI as chief executive of Alpha Financial Technologies LLC in Dallas.
It took Alpha Technologies nearly two years to iron out the legal and technical details that resulted in a licensing agreement with S&P, a division of The McGraw-Hill Cos. in New York.
S&P in turn licensed the DTI to Rydex, which has been marketing the fund under its alternative strategies unit as a "buy-and-hold investment for asset allocators," said Ed Egilinsky, managing director of alternative strategies at Rydex.
"We recommend a three- to five-year commitment to this type of fund, and it should be a part of an overall asset allocation strategy," he said.
The incentive to hold is underscored by a 1% redemption fee for shares of the fund held less than 90 days. On the subject of fees, this fund isn't cheap, particularly if you think of it as an index tracking strategy.
The fund's 1.65% total expense ratio can expand to about 2%, depending on the continuing transaction costs of the underlying securities, which are basically structured notes created by outside firms to replicate the return of the DTI.
In fairness, the fund can't really be compared with a typical index fund because the strategy involves buying customized structured notes from investment banks. The use of structured notes, which are made up of fixed-income products, is the only way a registered 1940 Act mutual fund can offer anything close to exposure to the managed-futures markets for retail-class investors.
Investors could bypass the mutual fund and buy the structured notes directly from an investment bank, but that would introduce liquidity and suitability issues, in addition to investment minimums that could be 10 times the Rydex fund's $2,500.
The fund's relatively short history is being bolstered by marketers with pro forma performance that dates back to 1985.
From 1985 through 2007, the pro forma annualized return of the S&P DTI was 11.5%, according to Rydex. Over the same period, the S&P 500 had an annualized return of 12.8%, and the Lehman Brothers Aggregate Bond Index had an annualized return of 8.5%.
The key, however, is the non-correlation aspect of the DTI.
Over the 22-year period dating back to 1985, the S&P 500 finished in negative territory in 1990 and for 2000 through 2002.
The DTI, on a pro forma basis, didn't have a negative year during the period.
On a monthly basis, the S&P 500's worst month during the study period was October 1987 when the index lost 21.5%.
The DTI finished that month down 2.1%.
The S&P 500's best-performing month during the same period was January 1987 when it gained 13.5%, while the DTI gained 1.3%.
The worst pro forma month for the DTI was calculated as March 1985 when it lost 4.7%, while the S&P 500 gained 0.07%.
The DTI's best month was September 1990 when it gained 8%, while the S&P 500 declined 4.9%.
Questions? Observations? Stock tips? E-mail Jeff Benjamin at [email protected].
