AdvisorShares Introduces New Systematic Multi-Strategy ETF

AdvisorShares Introduces New Systematic Multi-Strategy ETFThe timing might be just right for AdvisorShares and Sunrise to launch a new actively managed, multi-strategy ETF. In a recent survey completed by Morningstar and Barron’s, both financial advisors and institutional investors indicated that multi-alternative strategies were one of the top alternative investment categories for investment over the next five years. And this is on the back of fairly strong growth for the category over the past several years.

The new AdvisorShares Sunrise Multi-Strategy ETF (ticker: MULT) began trading Wednesday on the NASDAQ, and is one of only a few alternative, multi-strategy approaches in an ETF format. This new fund adds to the growing list of alternative ETFs offered by AdvisorShares, who now offers 14 such funds across a range of categories that includes commodities, long/short, multi-asset and short-bias.

Sunrise Capital Partners

San Diego based Sunrise Capital Partners, the sub-advisor to MULT, has more than 30 years of quantitative asset management experience providing alternative investment strategies to high-net-worth individuals and institutional clients. The AdvisorShares Sunrise Multi-Strategy ETF will be actively managed with a multi-model and multi-strategy quantitative investment approach, buying and shorting in different markets across a wide variety of asset classes including stocks, bonds and foreign currencies. The fund is designed to have low correlation to traditional investments, even in times of market volatility.

The fund’s portfolio managers are Richard C. Slaughter, Founding Partner and Chief Research Officer, and Chris Stanton, Chief Investment Officer. Slaughter was one of the early pioneers in systematic macro trading having launched his first fund back in 1977 and ultimately merged his firm with Sunrise in 1995. Stanton, on the other hand, brings a broad mix of capital markets trading experience along with finance and risk management related legal work as an attorney prior to joining Sunrise in 2012.

Stanton explains his quantitative outlook by saying he believes “the collective intrinsic intelligence of the market exists within accessible data.” The AdvisorShares Sunrise Multi-Strategy ETF will look for opportunities across asset classes, market caps, sectors, and countries, seeking to exploit statistical differences to generate returns. Stanton describes the investment approach as “highly disciplined, non-emotional, and systematic.”

The Investment Approach

In many ways, this fund is an elegant blend of different investment techniques used in managed futures, risk parity and multi-strategy portfolios. Rather than relying on a single investment strategy, Sunrise has taken three different investment models, each of which have a low correlation with the others, and blended them into a single portfolio that has an expectation of producing a better outcome than any one of the strategies on a stand-alone basis. The graphic below, sourced from an investment process overview for the fund, provides a good summary of the three investment models and how they work together:AdvisorsShares Sunrise MULT Investment Process

“The allocation to the three models is non-discretionary, systematized and rebalanced daily,” explained Stanton in a phone call. The process used to allocate capital to each of the three models is one of the key components of the strategy, and is done in a way to both manage the risk of the portfolio and minimize the combined correlation of the three models. This systematic daily rebalancing allows the team at Sunrise to constantly maintain what is considered an optimal allocation to each model even as the markets are changing.

Why MULT?

There is a clear reason why MULT is a good ticker for this fund, and might be a good fit in a portfolio. The underlying strategy is described as being:

  • Multi-model – three models combined into one portfolio
  • Multi-time frame – each model has a different time horizon for investing
  • Multi-market – the portfolio invests across multiple geographic markets
  • Multi-asset – each model invests across multiple asset classes

The fund itself is a bit hard to classify. While it is not a traditional managed futures fund, it certainly has some characteristics of managed futures strategies such as the trend following model. At the same time, it is not a straight-forward multi-strategy fund since those funds traditionally allocate across various types of “hedge fund” strategies such as long/short equity, global macro, managed futures, merger arbitrage, long/short credit, etc. Yet, it does allocate across three distinct models.

Perhaps a better way to think about the fund is how it can work in a portfolio. Rather than fit the fund into a particular bucket, Jason Gerlach, Sunrise’s CEO, likes to think about the fund as an “all-weather” core alternatives holding. He notes that given the low expected correlation of the strategy to both the equity and fixed income markets, the fund should fit nicely as a diversified alternatives allocation that helps improve the overall efficiency of a blended stock/bond portfolio.

At first glance, the expenses for the fund, which are currently running at 1.89%, appear to be high. And they certainly are high relative to other ETFs with somewhat similar strategies, such as the recently launched PowerShares Multi-Strategy Alternative Portfolio (ticker: LALT) with a current net expense ratio of 0.96%, or the WisdomTree Managed Futures Strategy Fund (ticker: WDTI) at 0.95%. However, compared to actively managed multi-strategy mutual funds or managed futures mutual funds, which are really a better comparison since MULT is an actively managed fund, the fee level is quite reasonable. Here, the expense ratios can easily exceed 2.00% and climb as high as 3.00% or more.

Keep an eye on this fund. If it does what it is billed to do, it would fit well in a portfolio that needs some diversification away from stocks and/or bonds.

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