Mark Rosenberg has been earning his investors money trading alternative investment strategies for two decades. Now he says these markets and the managers who trade them are about to go mainstream,much like stocks did in the late 19th century when they joined bonds in the retail investor’s portfolio.

Surviving in the markets requires evolution. Perhaps an idea that has become lost on most mutual fund managers, it’s common knowledge to futures trading veteran Mark Rosenberg, chairman and CEO of Ssaris Advisors LLC. Now, he says, a recent evolution in his business world will provide the resources to take full advantage of changes afoot in alternative investments.

Two years ago, State Street Global Alliance gained a majority stake in long-time commodity trading advisor and hedge fund RXR Capital Management. The former principals of RXR retained a 40% share of the new firm, Ssaris Advisors LLC, and continued managing their funds while using the added resources provided by State Street to create new products.

The original managed futures program, the Mark 3 Diversified Trading Program, just passed the 20-year milestone. Three years after its launch, RXR added two convergent hedge fund strategies, long/short equity and fixed income arbitrage. That addition fulfilled Rosenberg’s philosophy of providing diversification through both divergent and convergent investment strategies. The addition of State Street’s resources has allowed Ssaris to expand further and provide customers even greater diversification. Ssaris acts as lead manager for its institutional clients and can customize a fund of funds for them using Ssaris’ own programs and incorporating strategies from outside managers.

The original program has earned positive returns in 19 of 20 years. It has earned double-digit returns six of the last eight years and hasn’t had a down year since 1994.

Futures recently spoke with Rosenberg about the transition to Ssaris, its lead manager program and the growth of absolute return strategies to a wider audience of investors. Rosenberg is on the executive board of the Managed Funds Association but expressed his own opinions.

Futures: It has been almost two years since the creation of Ssaris. How has that transition gone?

Mark Rosenberg: It has just been great. The structure where State Street purchased a slim majority [60%] and the management [of RXR] kept 40% has really worked well because we kept the entrepreneurial spirit. It was a motivation to keep our management team and employees and still have the corporate structure [and] that has really helped tremendously. In addition State Street has relieved me of many responsibilities such as compliance, tax, legal, allowing our team to concentrate more on our main job which is managing money.

They also have a tremendous amount of resources – 1,700 investment professionals – which we are still learning to tap into. It has been a great fit. State Street takes [the] hedge fund and absolute return world very seriously. They are long-term players and we couldn’t be happier.

FM: At the time of the merger, you said that the additional resources from State Street would provide additional profits and additional risk control. Has that been the case?

MR: Yes. We have increased our money under management by about 70%, increased our revenues about the same. By having additional resources, we will be able to add additional employees, particularly in the risk management area. Ssaris has access to a tremendous amount of information and can digest it. One and one has become three.

FM: What new products, strategies or managers have you added since the creation of Ssaris?

MR: We continue to expand on our lead manager or fund of funds area. Our protected equity program has just completed its five-year record. It has beaten the S&P 500 by 350 basis points with about half the standard deviation.

Since we became Ssaris we have reached out to outside managers who have other expertise. For the last several years we have reached out to managers who possess skills and styles of trading that we don’t have in house.

We will act as a lead manager and diversify further in other areas, both convergent and divergent strategies. In divergent areas we have added pattern recognition and fundamental strategies and in the convergent area we have added statistical arbitrage, convertible arbitrage, long bias, short bias, high yield distressed security and merger arbitrage.

FM: March marked the 20th anniversary of your diversified program. How has it evolved?

MR: The original algorithms I created in the 1970s are still operating today; however, the risk management and money management techniques continue to grow and we continue to conduct research to improve our program. We reduced our standard deviation by 50% over the last 10 years and we continue to improve our program through research and development.

The latest of that was completed in 2001. We call it conditional switch. Conditional switch looks for technical statistical characteristics that signal that a trend is ending prior to the normal trailing stops. It is unique because these characteristics are based on our system not the underlying market. Overall, it has saved us over 6% this year. That switch was able to avoid the sharp market corrections in March of this year significantly reducing our volatility relative to our peer group. For example, we exited our position in crude oil at $37, and at the same time preserved our double-digit returns for the year.

FM: Has there been an underlying philosophy that has remained constant?

MR: The underlying philosophy of Ssaris and its predecessor, RXR, has been that we combine both divergent strategies [long volatility strategies] that make money during inefficient times with convergent strategies [short volatility strategies] that make money during efficient times. Markets are rational most of the time and are irrational from time to time. If that is the case, then you need strategies that can make money through both periods. The combination of those strategies, we think, gives us the best chance of having positive absolute returns every year.

FM: Is that approach unique?

MR: When you look at fund of funds most of them are convergent strategies. Very few mix the two. Only recently have managed futures gotten any play at all. Managed futures wouldn’t get selected by a fund of funds up until the last year or two, so I don’t think people have realized how important divergent strategies are. Certainly Long- Term Capital Management only knew about convergent strategies.

FM: When you started, your expertise was in commodities. Your programs trade almost exclusively financial instruments. Is there any difference in how you approach financial markets?

MR: Our diversified trading program trades 40 markets around the world. We use the same algorithms. We believe in having algorithms that identify an event across many markets. We believe in testing our algorithms in all markets rather than creating different models for different sectors or different markets. We are afraid of that because of form fitting or data mining. If we truly identify an event, it should work in most markets. And it does.

FM: Do you use the same algorithms on your equity programs?

MR: No. Long/short equity and relative value are convergent strategies and have a different algorithm, including fundamental data inputs as well as technical.

FM: Are any of your fund of funds products registered?

MR: We do have some public funds with Morgan Stanley that are registered and available to the public, both managed futures and in our balanced program. They are public limited partnerships.

FM: Are you planning on offering any registered products for retail customers?

MR: It is in discussion. Not directly, but through insurance or financial firms.

FM: There has been a great deal of concern over the retailization of hedge funds voiced by regulators and the traditional investment industry. Do you share their concerns?

MR: Retail clients deserve the right to participate in absolute return hedge fund strategies. This is too important of an asset class to stop retail clients from participating. However, if a manager wants to sell retail, he has to have regulation [and] full disclosure. We already are in the retail business. We have done it through managed futures. This type of client needs the protection and, by the way, the manager needs the protection of regulation and should be able to opt in and opt out.

If you are selling U.S. institutions, pension assets, where you are handling other beneficiary’s assets, you should be regulated to a certain degree. If you are selling super high net worth accredited investors and are investing [your] own money then I defend the hedge fund manager; he does not need the regulation.

Ssaris is SEC registered and I am the ERISA fiduciary for our fund. We do have transparency and daily risk management for our positions. We think that is necessary to go into the institutional marketplace and the retail marketplace. I differ from many of my colleagues on this area.

FM: Given the proper structure, would it be appropriate for more retail-sized investors to have access to alternative investment strategies?

MR: We cannot leave out the retail client because he deserves the right to have this asset class in his portfolio, only it has to be regulated to protect him. And by the way this protects the manager as well. It makes commo\n sense to me. For the non-accredited retail client, you follow the same rules as the mutual fund industry follows.

FM: What about fees?

MR: Any person should be able to charge any fee they wish based on their performance capability. I can hire someone to sing at my house but if I wanted Madonna to sing at my house it is going to cost me a lot more. As much as I am for regulation in the retail investment community I also would look for some relief in that managers should be able to get a fee if the client agrees.

FM: Will the [recent SEC] roundtable [on hedge funds] help to destroy the myth that hedge funds and managed futures are much more risky than long-only strategies?

MR: I am hoping that it will help. The key about hedge fund strategies is that they are long and short. A long/short strategy does not depend on the direction of the overall market. It is independent of market movement. That is the beauty of absolute return hedge fund strategies. We have the opportunity to make money in any economic environment.

FM: Fund of funds has been the fastest growing alternative investment strategy over the last few years. Do you expect that to continue, and how do you plan on benefiting from that?

MR: I do expect it to continue. Fund of funds are a way of getting the diversification necessary. Ssaris is participating in this. For a number of years now, we have reached out beyond our own in-house strategies and looked for the best managers around the world to complement our strategies. We have offered that for several years now and plan to continue.

FM: Since the end of the bull market [in equities], relative return strategies have taken a beating while absolute return strategies have flourished. Will that continue and do you expect the absolute return model to become the new managed funds industry standard?

MR: By the end of the decade absolute return hedge fund strategies, and I prefer the term ‘absolute return’ to ‘hedge fund,’ will represent up to 20% of most portfolios. Remember, the definition of absolute return hedge fund strategies are low correlation to the capital markets – stocks and bonds – and the opportunity to make money in any economic environment. That is the key to my definition.

FM: What positive changes do you see for the industry?

MR: If I am right, we are going through the greatest asset class paradigm shift in 100 years. Not since Charlie Merrill went around in the 1890s telling people how important stocks are going to be when [at the time investors] only bought bonds. I am saying that we can be, by the end of the decade, as much as 20% of a person’s portfolio. That is a huge asset class change. I also think that most managers are going to become hedge fund managers by the end of the decade. All these tools are going to be utilized by many managers. It shouldn’t just be endowments and foundations and the super rich that get to use this. People have a right to access this asset class as long as they are properly informed.

Q & A

Copyright Futures Magazine Group Jul 2003