Opportunity comes knocking
In 2003 — a much different regulatory environment than today — the CFTC amended its Rule 4.5 to exclude certain otherwise regulated persons from the definition of "commodity pool operator." One such group was an investment company registered as such under the Investment Company Act of 1940.
Prior to the change, a much more limited exemption from CPO registration existed for mutual funds. Futures positions had to be part of a "bona fide" hedging position or subject to a 5% de minimis level and they could not be marketed as commodity pools.
There is some debate on the intent of the 2003 rule change, but it really doesn’t matter as it allowed financial innovators to offer managed futures products to a much wider audience in a less burdensome way.
One person who was determined to find a way to offer the benefits of managed futures to retail was Rich Bornhoft, founder and CIO of Equinox Fund Management.
While many other CPOs were raising their minimums or waving a white flag in the face of a tilted regulatory playing field, Bornhoft was developing his Frontier Fund, a public commodity pool that offered many of the attributes of a mutual fund.
"We launched the Frontier Fund in 2004. The Frontier Fund is a family of managed futures funds that offers daily liquidity," Bornhoft says. "It has certain mutual fund features, like daily liquidity and a daily NAV, which provided us substantial experience over several years of operating a family of managed futures funds with such a structure. Mutual funds that access managed futures are just a logical evolution of investments."
In the beginning
The first benefactors of the 4.5 exemption were large institutions offering long-only commodity fund products in a mutual fund format.
"Over the last several years, the long-only commodity indexes — Goldman, Dow Jones [etc.] — have found their way into mutual funds, they have found their way into ETFs (see "Would managed futures by any other structure...")," Bornhoft says. "In addition to that, there have been a number of indexed strategies that have found their way into mutual funds in the last two to four years."
Standard & Poor’s created its Diversified Trend Indicator (DTI) that attempts to replicate a trending approach to a group of 24 physical and financial futures. It has been licensed as a mutual fund to Rydex and as an exchange-traded fund to Wisdom Tree.
Bornhoft says these products helped lay the legal groundwork for actively managed mutual funds like Equinox’s MutualHedge Frontier Legends Fund launched in early 2010, which offers exposure to five CTA programs (see “A legend in the making”).
Others have followed. Altegris Investments launched its first registered Investment Company (RIC) fund in September and it is already managing $350 million.