Should RIAs Offer Quant Funds? 

Active investing has dominated the financial markets over the last several decades, with fund managers highly recognized for their ability to identify top-performing assets and sectors. However, as fund managers have struggled to outperform benchmarks in recent years, quantitative funds have grown in popularity, notably in the wealth management industry. 

To understand more, Hoffmann addressed topics such as why RIAs should consider offering quantitative funds to their clients, how CFM’s systematic trading strategies serve high-net-worth individuals, and what is the typical fund composition financial advisors are looking to implement for the clients, among other topics. 

CM: Why should RIAs consider quant funds for their client’s portfolio?   

Hoffmann: RIAs aren’t approaching investing fundamentally differently from other investors. Firstly, they look for an expected return on capital, after that investors want to understand how much risk is being taken, and then they want to understand if the risk they are potentially exposed to is complimentary to what they already own in their portfolio.  

Systematic investments strategies are potentially well-positioned to deliver on those dimensions. On the last point – complementarity to their existing investments, a systematic investment process by itself is different from discretionary or passive approaches which can bring some diversification benefits to portfolios.   

CM: Explain CFM’s systematic trading strategies and how they serve high-net-worth individuals.  

Hoffmann: CFM is generally known for multi-strategy, macro, and trend-following oriented strategies. Within these strategies, we invest broadly across asset classes, such as equities, fixed income, currencies, and commodities. From the beginning of the firm in 1991, we have focused on identifying relationships between data points and price movements of the assets we trade.  

Our researchers put enormous energy into understanding such relationships to a point that we can put rules around them – i.e., if data pattern “x” emerges – do “y”. As a result, we can potentially identify and execute on multiple signals at the same time. 

Of course, data is an important component for our strategy. At CFM, we have a team of almost 50 people, split between data scouts, data engineers and data scientists who identify, onboard, test and make information available to our researchers.  

Technology is another important aspect – not only does it enable these processes to run, but it also expands the opportunity set, whether that is being able to trade more frequently, or by using machine learning techniques to identify new signals. 

From our clients’ perspectives, they care firstly that we perform along the lines of performance expectations. Often, we are selected to be in the “diversifying group” of allocations that they make – that’s a group of strategies that is less – or ideally not at all – dependent on the expansion of economic activity, which drives many traditional benchmark indices.  

These “diversifying” investments are frequently a smaller, but important, allocation in clients’ portfolios. Clients allocate to us often with the expectation that our investment strategies will help them better balance their own portfolios. We also provide good liquidity across most of our strategies, which allows clients to rebalance dynamically and increases the utility of the strategy in their portfolio. 

CM: Why did you decide to ramp up your offerings targeting RIAs?  

Hoffmann: We have been in touch with the largest wealth platforms for the last 20 years. The progression in the U.S. wealth market is that while these platforms have remained significant hedge fund investors, more and more advisors left the large private banks and wirehouses and chose to work as independent advisors. Initially, this shift made it more difficult to continue to work with these advisors, as the previously available infrastructure was left behind at the bank platforms.  

Over the past 10 years, two things have changed – the infrastructure is no longer captive to the banks, with firms like iCapital now providing infrastructure to both banks and advisors.  

Secondly, the advisors have recognized that there is value in scale. Many formerly smaller advisors have grown organically or merged with another, leading to larger RIAs that have the scale and need to differentiate themselves. These advisors’ investment capabilities have expanded, and many have hired dedicated fund researchers that have the time and skill to evaluate and onboard alternative managers. That makes these advisors (again) a natural partner for CFM. 

CM: Can RIAs customize a strategy? If so, what is a typical fund composition?  

Hoffmann: Our portfolios are typically multi-asset in nature. They generally include a large investment universe of assets that can perform independently from one another and give us the ability to find opportunities in different markets and situations. Think of the portfolio as having a potentially large number of individual holdings across the different asset classes. 

Depending on the investment strategy, our portfolios can include derivatives and/or individual securities. On customizability, we are open to discussing such interests with allocators. But for it to ultimately be an efficient investment for both sides, a certain amount of scale is typically required.  

CM: How does CFM differentiate its fund offerings to RIAs? 

Hoffmann: Our firm and investment programs differentiate themselves by the way we approach investing and the resources we put behind it. There is a small number of high-quality competitors, and often the question we are facing from advisors is which strategies are available and have capacity. 

There are some differences that wealth managers care more about than institutional investors. On the wealth side, we often don’t see the final client and instead work with a fund researcher. What matters here is that the organization we are working with can communicate what CFM and our investment programs stand for, first to their advisor network then from the advisors to the clients (and sometimes there are more layers in between). As a result, an important part of this process is having a distinct firm and investment profile, established track records and good communication practices.  

After-tax returns are another topic that advisors often want to hear about, and while we don’t manage tax situations specifically, the investment universe can potentially impact net returns for investors.  

We have also moved from offshore private funds to sub-advising multi-manager mutual funds and working with fund platforms to create better accessibility for our strategies. 

CM: Tell us more about your core strategy – Discus– and what’s the appeal for RIAs.  

Hoffmann: Discus is the strategy CFM launched at its inception in 1991. Today, Discus is a diversified multi-strategy, futures-based investment program. It essentially captures all our futures related alpha strategies in one portfolio.  

Discus is based on a large global investment universe of liquid futures contracts and has achieved double digit net annualized returns since inception, essentially without correlation to major traditional market benchmarks. Our researchers continuously work on improving the strategy, adding new markets or signals when they believe they can be additive.  

Over the past couple of years, signals derived from alternative data sources have been a fruitful segment for us to explore. It takes a lot of ingredients to manage a strategy like Discus – infrastructure, data, signals – and a process to do that daily. It ultimately reflects the desire and commitment from CFM and our people to continuously explore, create and improve our investment programs.