Even the robots are getting active...

November 23, 2015 09:30 AM

The rise of Robo-advisers has dramatically affected the broader debate about active and passive management. Robo-advising has targeted a perceived vulnerability among active management: Fees. The combination of lower fees and the perception of strong passive performance have boosted assets in the robo-advising space significantly. But the next generation of robo-advising aims to adopt the-best of both worlds by providing active management strategies. Modern Trader sat down with Walt Vester, a former director at BlackRock group, who founded robo-adviser Huygens Capital in 2011. 

Modern Trader: How did Huygens get started?

Walter Vester: I founded Huygens in 2011, after a decade of working in alternative investments, investment management and corporate finance. When I founded the firm it was because I saw a market need for an alternative investment strategy that was systematic, intuitive, transparent and liquid. We started out marketing our strategies to institutional and wealthy investors. Since 2011, we’ve observed the explosive growth of retail alternatives and we realized our strategies are perfect for that market and well-suited to the robo-advisor delivery channel. So in 2014 we [decided] to offer our products via a robo-advisory service and we launched it this summer.

MT: What is the current need in Robo?

WV: Because of the Internet on-boarding and service delivery, today’s robo advisors are systematic, accessible, fast, cheap and liquid. However, they generally employ an undifferentiated investment management process. They build a diversified multi-asset portfolio for the client and then periodically rebalance it to keep its asset allocation static. This is an approach for delivering acceptable, 
if unremarkable, returns.

MT: Are there any limitations to Robo-advisors?

WV: “Betterment, Wealthfront and Schwab Intelligent Portfolios blazed the trail and provide a product that the market wants. The limitation is that all follow the same investment model based on Modern Portfolio Theory. With this model, you’ll always have some assets in the portfolio with a poor risk-return tradeoff. 

MT: Where do you see opportunity?

WV: Like other investment products, the Robo-advisor market is evolving to incorporate active and passive management. We see an unmet need for more sophisticated active risk management in the robo-advisor market. We call it robo 2.0.  We focus only on the U.S. equity asset class, and we have developed a risk management system specific to this asset class, designed to monitor market stress on a daily basis and protect our clients’ assets from volatility.

MT: What does that downside volatility look like?

WV: Periods with above average S&P 500 volatility cost investors money. Over time, the months with the lowest S&P 500 realized volatility have given investors much better returns than the S&P 500 overall. The months with the highest realized volatility have given back much of those returns. Downside risk is highest during periods of elevated volatility. So our objective is to predict and avoid those periods.

MT: What is the case for robo active strategies?

WV: New and compelling products [have] plenty of room to be successful. The MPT approach is getting crowded. Each active strategy can be proprietary and there can be room for a lot of those. 

MT: The fees are 1.25% for your platform. Why?

WV: We can generate better returns than the modern portfolio theory approach by focusing on one asset class and incorporating a risk management overlay designed for that asset class. We [offer] a premium product via the robo-advisor delivery channel.

About the Author

Garrett Baldwin is the Managing Editor of the Alpha Pages and the Features Editor of Modern Trader. An author and Baltimore native, he earned a BS in journalism from the Medill School at Northwestern University, an MA in Economic Policy (Security Studies) from The Johns Hopkins University, an MS in Agricultural Economics from Purdue University.