New York-based boutique asset management firm Exceed Investments, the firm pioneering "defined outcome" mutual funds that mimic traditional structured notes, has sold the Exceed Defined Shield Index Fund, to alternative-focused mutual fund company Catalyst Funds. The fund has been rebranded as the Catalyst/Exceed Defined Shield Fund (SHIIX), and will maintain the same investment strategy as its predecessor.
Exceed entered the US retail market in 2015 with its Exceed Defined Shield Fund (now the Catalyst Exceed Defined Shield Fund- SHIIX) after partnering with Nasdaq in September 2014, to develop a suite of three indices which comprise diversified rolling baskets of investment grade fixed-income securities and exchange-traded options linked to the S&P 500.
This is the second fund that Catalyst co-advises with Exceed; the first was the Catalyst Exceed Defined Risk Fund (CLPFX), launched earlier this year. The Defined Risk Fund seeks capital appreciation by attempting to track the Nasdaq Exceed Defined Index. The strategy uses options to seek upside participation of 150% of the S&P 500 Index up to a cap while attempting to protect against the first 10% of losses.
According to Joe Halpern (pictured), portfolio manager of the fund and chief executive of Exceed Investments, both funds were developed as the next generation of structured notes investing based on two innovations. "First, we changed the way a structured note is engineered by replacing the single counterparty risk with a diversified credit portfolio and use exchange-traded options in place of over the counter options," said Halpern. "Second, we changed a term-based product into an open-ended structure. This open-ended fund structure is working and proving its appeal."
According to Halpern, the partnership is aimed at "increasing distribution" as the products "gain traction" in the market. "We have partnered with a firm with a proven record to expand the reach of these funds which combine the best elements of structured notes and mutual funds within one efficient package to the broader market place," said Halpern. "Catalyst has over US$6bn of asset under management, have a very strong support network and a forty-strong sales force. We think Catalyst will help us to manage the funds even better and get the story out there."
'The acquisition of the Exceed Defined Shield Fund expands Catalyst's portfolio of 'defined outcome' investment strategies by adding a fund with a proven track record,' said Jerry Szilagyi, CEO of Catalyst Funds, adding that the Exceed team has developed strategies that allow portfolios to seek to hedge against bear markets, while attempting not to sacrifice profits on the upside. 'We think this is an important portfolio management tool and one that we want to offer investors alongside Catalyst's range of alternative investment strategies.'
Halpern is seeking to develop a comprehensive range although the focus at the moment is on "growing the assets" of the two products and "continue educating advisors" about how these kind of fund can sit alongside structured notes and other investments.
"These products (48 Act open-ended UIT with structured notes strategies embedded) are not designed to replace structured notes but to complement them," said Halpern, pointing that there was a gap in the market and increasing demand for products that could address some of the issues surrounding structured notes such as liquidity (daily liquidity), credit risk, and easy implementation into model portfolios.
"Advisers and broker dealers in the US market are shifting towards creating model portfolios for their client base, and this kind of product is a lot easier to implement because investors don't have to be accredited, and you don't need a minimum size," said Halpern. "Furthermore, some advisors have limits on how much credit risk they can have and these funds can be used like any other equity-hedged products."
The first stage of development was to come up with one or two strategies that would respond to existing demand from retail investors hence the use of the S&P 500 index, according to Halpern. "However, we can now add new flavors and underlying strategies to complement the exposure to the S&P 500 with assets that are equally popular in the US," said Halpern. "We are working on ideas to develop new products and we think the Russell 2000 and other emerging markets underlyings would provide a very interesting follow up point for us to go. There is room for us to develop our offering and we think the partnership with Catalyst will also provide us with sound distribution capabilities."
According to Halpern, the partnership with Catalyst will help to capitalise on the uniqueness of Exceed's proposition which could also bring more business to the structured notes market. "We cannot deny that structured notes have a role to play in the market place because they can react quicker to a perceived trade in the market, and is cheaper to launch," said Halpern. "Mutual funds are not set out to do single trades. The type of opportunistic and more speculative trades we see in the structured notes market could never be replicated in a mutual fund. We think we are informing the debate around structured notes and we think the discussion around our products could help advisors to open up to and feel more comfortable with structured products."
Other US investment firms active in the 'defined outcome' segment include CBOE Vest, JVB Financial/Olden Lane Securities, and Alaia Capital which suggests this product type has found a niche in the US retail market.
The Defined Shield Fund strategy tracks a basket of four rolling "defined outcome" investments, which meet two specific characteristics. The first seeks to limit losses to approximately the first 12.5% of S&P 500 Index losses on an annualized basis. The second, seeks annual upside participation in the S&P 500 Index to a maximum gain of 15%, even if annual S&P 500 Index performance surpasses that percentage. For investors, this means the Fund will seek to provide a limit to losses during extreme market declines, while potentially providing profit during market upswings. The Defined Shield Fund will continue to be managed by Joe Halpern.
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