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Ex-Blackstone Exec Set to Debut Actively Managed Robo

By Murray Coleman October 2, 2015

The march by robo-advisors to open investment management to the masses has taken a new form. After the rise of low-cost passively run online services, a longtime veteran alternatives-fund manager is set to unveil a robo that’s designed to deliver actively managed portfolios.

New York-based Huygens Capital will announce next week it’s launching a tactical robo service for advisors and their clients. It’s built with algorithms that automatically shift portfolios when market conditions dramatically reverse course. The service is led by Walter Vester, a former managing director at private-equity and alternatives asset-management giant Blackstone Group.

“The first generation of robo-advisors — firms like Betterment and Wealthfront — offer a great low-cost model for advisors to help investors with smaller portfolios,” Vester says. “But robo 1.0 is rooted in static asset-allocation strategies. We see a largely unserved need in the market for robos willing to take the next step and provide an even more flexible set of investment strategies.”

Using index-based ETFs, Huygens’ computers key to several market factors. But the real secret sauce, according to Vester, is the system’s monitoring of S&P 500 options activities. Used by institutions to hedge against coming storms, he says a wealth of academic and industry-specific research shows that certain trading patterns tell when it’s time to make certain portfolio changes.

A small number of the investment advisor’s select clients have been using the robo service over the past year. Now Huygens figures it’s ready for prime time — and, as of next week, open to all comers. It’s charging 1.25% for the robo service, which Vester admits is higher than most passively based platforms. “We believe strongly there are a lot of investors who want to invest in a fully automated environment and are willing to pay for a premium product that’s designed to deliver better risk-adjusted returns than a passively managed portfolio,” he says.

Huygens isn’t the first investment advisor to try to crack into the robo marketplace offering some form of active management. New York-based Hedgeable launched its own retail robo offering last May. The firm, which Vester considers to be his closest competitor, reports it’s seeing growth in client assets rise — most recently by an average of about 10% a month. It now manages close to $40 million, according to cofounder Matthew Kane.

The idea behind Hedgeable’s investment strategy centers on triggering automatic portfolio changes only when predetermined price targets — set individually for each different asset class — fluctuate within certain ranges. Like Huygens’ robo, the system’s engineers say they’ve built in enough sensitivity to big market swings to protect against big portfolio drawdowns.

But Kane says such mechanisms don’t lead to churning, which can trigger higher trading fees and undermine long-term returns.

Walter Vester

Besides offering robo services to mom-and-pop investors, Hedgeable has developed a platform catering to advisors. About 50 RIAs have already signed up for the service, says Kane. Fees range from 0.3% to 0.75%, depending on account size. Advisors who are partnering with the firm get to create their own site branding and can add clients directly into the system themselves.

Over the next year, Kane thinks Hedgeable will see enough demand for active robo management to reach several hundred million in assets under management. The firm is working on deals to offer its robo services through several large banks and insurance providers — and expects to announce deals in the next few months. “We’re not hoping to reach a large number of retail investors ourselves — this is a different sort of distribution model,” Kane says. “Most of our growth is going to come through third-party partnerships, not huge marketing campaigns.”

But not everyone’s convinced of an overriding need for all-active robo providers. While agreeing that not all investors want to stick with index-based portfolios, advisor Chad Carlson in Itasca, Ill., worries that the same sort of “either-or” mentality will hamper the relative attractiveness of such a rising cast of active robos.

As a member of the investment committee at Balasa Dinverno Foltz, which manages more than $3 billion, he’s been closely monitoring developments in the market with an eye on someday incorporating such technologies into the firm’s menu of services.

The independent RIA uses a mix of active and index funds in client accounts. That’s a trend Carlson sees as fairly common in the industry, and it’s a reality today’s online technology fails to mirror.

“We have active-only robos coming out — which will solve a need, for clients who don’t want anything to do with index funds,” he says. “But in terms of moving away from either extreme — passive or active — there still is a shortage of sensible hybrid robo solutions that can take from the best of both worlds.”