Five Minutes With Adam Rochlin
Adam Rochlin, senior vice president for alternative investment strategies at MF Global, believes in retirement investment options. As such, he is pushing for regulatory cooperation that would allow everyone the chance to invest in managed futures as part of their 401(k) retirement accounts. Rochlin shared his ideas on how to make managed futures available to the masses.
Q: Why should managed futures be allowed into 401 k plans?
A: The fundamental benefits of managed futures are: you get diversification from traditional assets like stocks and bonds. And you get return potential. And at the underlying investment or portfolio manager level, you have a high degree of liquidity and transparency relative to other alternative investment vehicles such as traditional hedge funds. The key benefits of diversification, return potential and control, are the three key reasons that there should be serious consideration to getting this type of investment along side of others that are available.
Q: How can the managed funds industry make that happen?
A: One key change that has to happen is better coordination between the SEC and the CFTC in terms of their regime focus on how these products should be structured and available to individual investors beyond the current accredited investor test. Today there is no coordination between the SEC and the rules they laid out regarding what is an individual investor and what is an institution, and the CFTC’s rules.
Without regulatory harmonization, I think you’re going to have a tough time getting new products in this area, not just created, but getting them distributed not just into cash brokerage accounts, but more critically into those retirement savings accounts.
Q: When you say better coordination, what do you mean?
A: The CFTC regulatory regime has made it very challenging for retail investors to have access to high-quality managed futures programs without passing the accredited investor test. So for the mass market, there is a challenge in enabling individual investors, regardless of income level, to look at these funds.
Of course, they are not suitable for everyone. The key is that their concerns about risk and investment experience have not caught up with the sophistication of technology and risk management practices. And they have not caught up with the financial crisis, which is not looming, it’s here for millions of Americans.
The SEC has long been a proponent of enabling products to be created, marketed and distributed to the mass investor. The CFTC seems to be a little behind the curve in terms of modernizing its regulatory regime to allow that lower-level income point for individual clients.
There is a structural snag when you want to do a managed futures offering for an individual investor. The CFTC is today, and the MFA is on record objecting to this, believe that it is not permissible to create a 40 Act-like fund that adheres to the CFTC regulatory regime, regardless of whether it is in an individual account or 401K plan. So there is a fundamental difference between what the SEC would allow and what the CFTC rules would allow.
If you follow the letter of the rule, you cannot get there today. Some firms have gotten there, not to 401K plans but to retail investors, by using the loophole created by the SEC in 2003. So there are some managed futures firms, akin to 40-Act product, who have followed the SEC regime and have made their products available to investors and financial advisor networks. The NFA has taken issue with that because they do not believe they are managed futures funds, and do not follow the NFA best practices around disclosure and product structure.
So in order for us to get there, we need regulator coordination.
Q: Is there any legal reason or hurdle that prevents a company from offering managed futures?
A: I cannot think of one from a Department of Labor standpoint. It’s just more of a structural issue of creating a 40-Act Fund, made up of futures contracts.
Q: So you need the CFTC to change the rules on who can use these types of products.
A: Exactly. The issues they would be concerned with are disclosure and discern-ability. People really need to understand the risks and cost. So the question is how do you do this in a reasonable way and a compliant way that makes both regulatory regimes comfortable?
I think it can be resolved, but it will take some coordination between the two agencies.
Q: Are you making any efforts in this area to bring in both agencies?
A: No, we haven’t seen anyone yet which is why we’re talking about it.
Q: This is a somewhat touchy topic. You can make the case that managed futures can balance out a portfolio, and offer relief in tough markets like 2008 when managed funds performed very well. On the other hand, there is the issue of education and how much people understand them.
A: I agree it is a sensitive topic which is why we need to get the dialog going. We spent a decade trying to get individual investors to diversify into growth, value, domestic, international, fixed income, high yield and so on across the risk spectrum. And we did a good job as an industry. But it didn’t work out real well in 2008 and there are employees, clients, individuals who are still under water almost three years later.
So to not engage in serious conversation about it would be almost irresponsible, at least in terms of exploring the feasibility of it. I can’t think of many firms out there that would not have a serious conversation about it. Anyone who wants to throw out the preconceived myths about the volatility of the product, is not looking at the facts.
A: The good news about the MFA is that they’ve had strong leadership with Richard Baker and the team he’s brought in. They’ve done a very good job for the managed funds industry where they’ve stretched beyond the futures side to the hedge fund side. Unfortunately, that’s meant that the voice for managed futures issues has been a bit diluted.
But you’ve hit on something that is critical. We don’t have a singular voice in Washington fighting this cause. This is a side of the business that is slightly quirky with many CTAs being small independent firms. But what is amazing to me is that there is $280 billion worth of assets in managed futures as an asset class. That’s the second largest alternative asset class category in the industry, behind the $2 trillion in hedge funds. So we should be able to throw the elbows around a little bit and get a seat at the table. We’ve had a tendency to take care of home first. We’re dramatically under-serving ourselves and that’s a conundrum that we have to fix.
But when you see the investment piece and the benefits for something like this, you can’t help but get excited about it. There is a fundamental investment case for this asset class. It’s not a flash in the pan.