Mount Lucas' Product Emulates Hedge Fund Investing

March 8, 2001 ( - Who needs a hedge fund, if you can get the same type of exposure and risk/reward profile at a fraction of the cost in fees -- with full transparency thrown in to boot?

That’s the question Mount Lucas Management, Princeton, N.J., is throwing at the institutional investment world these days as it unveils its latest index-driven alternative strategy.

And while the new Mount Lucas Management Global Markets Strategy may sound like a hedge fund there are some big differences. One of the biggest differences between GMS product and your standard hedge fund may be the fee structure. While most hedge funds charge a 1% management and 20% incentive fee, the Mount Lucas vehicle charges much less. It charges the standard 1% management but only a 10% incentive. And transaction costs are one-fifth of the standard 100 basis points typically seen in the hedge fund industry.

“Investors have been demanding new hedge fund products that can offer transparency, liquidity and more reasonable fees,” Mr. Rudderow said. “We came up with GMS to address that need.”

Global Markets Strategy is not another equity index fund dressed up to look like a hedge fund. In fact, it offers investors exposure to many of the markets that a global macro manager would play. Mount Lucas achieves this by including in its portfolio bonds, currencies, equities and commodities, in the form of futures contracts. Individual elements of the index can be either long or short.

“This is the type of exposure that an institution would typically be getting if they were invested in a hedge fund,” said Tim Rudderow, president. “The way we see it, is that you can use a strategy like this as an enhancement to other hedge fund investments or as a stand-alone core strategy.”

Five equity benchmarks, six currencies, five fixed-income contracts are included along with various baskets of physical commodities.

“For each dollar of exposure, the investor is getting 40 cents in bonds, 30 cents in currencies, 20 cents in stocks and 10 cents in commodities,” Mr. Rudderow said. “If someone opens a managed account, they would also be able to customize that portfolio. For instance, they might want to exclude the equity component altogether – or raise it.”

The index-driven product is rebalanced at the end of each month. Liquidity is daily for fund investors and daily for managed accounts, as demanded by institutions.

The new strategy already has $10 million under management and the firm has just secured another $20 million from an institutional client, according to Mr. Rudderow. GMS, which was trading for sometime with proprietary capital, opened to outside investment this month.

Mount Lucas is hoping features found in GMS product will prove to be a major institutional magnet, since fees, transparency and liquidity are major hot-button issues that might otherwise forestall a hedge fund allocation.

“I imagine that there are institutions who will be using this to get their toes wet with hedge funds,” Mr. Rudderow said.

The commingled GMS fund uses three-times leverage to augment returns. But separate accounts can modify leverage levels, as did one early institutional allocator, which chose to go with only two-times leverage.

The fund is open to institutions and high-net-worth individuals with a $100,000 minimum. Managed accounts begin at around the $10 million and $15 million.

Mount Lucas is perhaps best known in the managed futures world. And the GMS product follows in the footsteps of the MLM Index Fund, a Mount Lucas an active-index product that targets non-correlated opportunities in commodities markets, while keeping fees low enough to entice institutions as well as high-net-worth clients.

“Commodities have become something of a niche market and investors are in general are really paying more attention to hedge funds right now,” Mr. Rudderow said.

The MLM Index Fund has been on a roll in terms of garnering investor interest. “We’re at about $95 million,” said Ken Banwart of Atlanta-based Aspen Partners, which helps market and distribute the Mount Lucas product. “In January and February, we added $18 million in new allocations, including money from a major institution.”

The MLM Index fund comes in two flavors – unleveraged and leveraged. The unleveraged series was up 13.8% in 2000, while the series that uses three-times leverage climbed 33.6%.

The minimum-investment for the MLM Index Fund is $25,000, far below the $25 million demanded by Mount Lucas for individually managed accounts.

The MLM index, like the Goldman Sachs Commodity index, aims to offer investors’ access to a futures industry equivalent to the equity market’s S&P 500. The Mount Lucas index can be long or short and is composed of the 25 most-liquid contracts traded on U.S. exchanges, rebalanced at the end of each month. Current baskets traded include physicals, currencies and interest rates.

Aspen Partners will also be handling planned distribution for the GMS strategy on the retail side.

By Pete Gallo, Editor,


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