Ferrell Capital Management Inc. is still in business, just not the same business it started 24 years ago.
Gone is a hedge funds-of-funds business in which many large banks invested to manage their portfolios' market risk. In its place and scheduled to launch by the end of the year is a new target volatility strategy that will be offered in a separate account format and likely a commingled ETF fund, said William G. Ferrell, president and chief investment officer.
The Ferrell Target Volatility Fund manages the risk of the world's most commonly used investment benchmark, the Standard & Poor's 500 index. Using program trading, the Ferrell strategy manages the exposures of 10 industry subcategories of the S&P 500 to maintain a 20% volatility level at all times, Mr. Ferrell explained.
When volatility rises, the trading program automatically reduces holdings of S&P 500 sector stocks depending on market risk. When market or sector volatility is low, on the other hand, Ferrell Capital's investment team employs leverage to ratchet the portfolio's risk level back up to the 20% target.
Historical back testing of the strategy for the eight years ended Dec. 31 showed annualized outperformance of 7.3%. Year-to-date performance as of Sept. 30 was 28%, Mr. Ferrell said.
“We are happily out of the funds-of-hedge funds business and are getting serious interest from U.S. and European institutional investors in the new strategy,” Mr. Ferrell said.
This article originally appeared in the October 15, 2012 print issue as, "Ferrell drops hedge funds of funds for a new strategy".