Q&A with Ryan Hart who serves as the Director of Research and Portfolio Manager for CoquestAdvisors, a provider of specialised investment research, consulting services, and customised portfolio solutions to family offices, institutions, and registered investment advisors. Interview by Ole Rollag, Managing Principal of Murano.
Q: How did you start in the industry?
A: Fresh out of undergrad I started my career at Franklin Templeton in the Bay area. At the time, I wanted to be an equity PM and pick stocks and manage stock portfolios. I was in a training programme and was allocated to an assignment with the Fund of Hedge Funds group. At the time I had no idea what a Fund of Hedge Funds was and I didn’t want to pick funds. I picked funds for my 401k. Luckily, my mentor took me under his wing and I had the opportunity to learn about all these different Hedge Fund strategies. We invested in pretty much all strategies across the hedge fund spectrum. I quickly fell in love with analysing complex investment strategies rather than digging into corporate financial statements. I enjoyed the breadth of Hedge Fund strategies and the fact that the job entailed interacting with some of the smartest investment minds in the world.
Q: How did you get into CTAs specifically?
A: It was sort of serendipitous. I’d spent my career allocating to all kinds of hedge fund strategies, including CTAs, for FoHFsand family offices. Managed Futures have typically been a small part of the portfolios I worked on, but when I joined Altegristhey had a large allocation to CTAs so I found myself digging deeper into the space than I had done before. I quickly realized how misunderstood the space really is. A lot of allocators think of CTAs as just long-term Trend Followers or systematic “black box” traders, but the space is so much broader than that. The term “CTA” or “Managed Futures” is about as meaningful as the term “Hedge Fund.” It tells you more about the investment structure than it does the actual strategy being deployed. When I think of CTAs, there’s discretionary macro, commodity specialists, short-term pattern recognition, to name just a few. There is a very broad and diverse set of strategies and asset classes that you can trade. Combine this with the liquidity and the capital efficient leverage available and I find the vehicle to be ideal for building more robust, multi-strategy portfolios than the traditional hedge fund wrapper.
Q: CTAs seem to have had a really tough time recently. What are you seeing in the market that still makes a good argument to allocate to CTAs?
A: The headline numbers have been disappointing, but those numbers are dominated by the big trend-following managers. Managed Futures are much broader than that. There are some strategies which have done quite well. It is difficult to generalise across all CTAs and Managed Futures strategies. Broadly speaking, we believe that CTAs tend to perform best when volatility is elevated. We have been through a long period of low volatility induced by QE but are starting to see this normalise. CTAs also tend to do better when correlations are low across asset types and there is dispersion between economies and asset-classes. We think the market may be at a turning point where increased volatility combined with lower correlations will be more beneficial to CTA strategies.
Q:Is performance the most important thing when allocating to a manager?
A: Absolutely not. I think performance is a result, not a reason to allocate to a manager. It’s certainly something we pay attention to post allocation, but performance should be something which is the result of a good process. The most important thing when allocating to a manager is to deeply understand their strategy. Does it make sense? What are the risks? What are the return drivers? The next thing that we focus on is the investment process and discipline of the manager. If they’ve got this great strategy that we’ve bought into, we want them to have the discipline and process in place to consistently execute it day-in and day-out. Manager integrity is also paramount. You want a manager to do what they tell you they are going to do and not suddenly change their stripes when things get tough.
Q: As an allocator, you don’t get fired when you hire a large manager. True or false, and why?
A: False. I think that big managers are certainly easier to get comfortable with for a variety of reasons. They typically have longer operating histories and more data to analyse. They also tend to have fairly established processes and experienced people that can execute them. Plus, the fact that they have a large asset base typically means there is less business risk.
That said, there are a lot of downsides as well. Managers can get so big they grow complacent and are happy to live off their management fees. Size itself can be a burden to some of these strategies in terms of liquidity, which markets they can trade, position sizes that can put on, etc.
Q: What causes you to redeem from a manager?
A: The most common reason is when a manager fails to meet expectations. I mentioned before that the number one thing we want to do is to understand a manager’s strategy: How do they trade? How do they size positions? How do they manage risk? Etc. Any divergence from these expectations will mean we’re going to be asking some very tough questions.
On the flip side, we’re always out there looking for new talent. Everything we do is on a portfolio basis, so every manager allocation serves a purpose and needs to add value to our portfolio. If we find a manager that we believe is more talented than one we currently have, or who benefits the portfolio in some other way, we won’t hesitate to upgrade.
Q: What makes you different from other advisors to allocators?
A: Our expertise and breadth of knowledge on CTA strategies is a differentiator. Also, the multi-strategy approach we take to building Managed Futures portfolios is unique. We only have modest exposure to trend-following strategies, and we complement that with short-term traders, discretionary macro strategies, commodity specialists, etc.
We strive to have a deep understanding of all these strategies, regardless of what the underlying process or methodology is. We don’t invest in black box strategies where there is no transparency into the drivers of risk and return. Then we take a multi-strategy approach in putting it all together. We want to understand how our managers are different and what they are each contributing to our portfolio.
Our concentration is also a differentiator. We only have 6 managers in our model portfolio. I doubt you will ever see us go north of 10. I think it’s difficult to find managers unique enough to justify having smaller positions just for the sake of “diversification”. We want to find 6-10 highly talented managers, deploying unique strategies, and then structure a robust portfolio around them.
Ryan Hart has over fifteen years of experience in investment research, due diligence, and portfolio management. Prior to joining Coquest, Hart held similar roles at AltegrisAdvisors, Wells Fargo Advisors, and Meritage Capital. He began his career as a Hedge Fund Analyst at Franklin Templeton Investments. Hart graduated Magna Cum Laude from the University of San Diego with a Bachelor’s in Business Administration with an emphasis in Finance. He is a Chartered Financial Analyst (CFA) and a Chartered Alternative Investment Analyst (CAIA).
