PRINCETON, N.J. - Two standard-bearers for the institutional use of managed futures joined forces with an investment industry veteran to create Trilogy Capital Management L.L.C.
Formed by Alan Kaufman, Charles A. "Tony" Baker and Alfred Bearman, Trilogy's aim is to manage assets using strategies that embrace the idea that futures markets carry an inherent return.
Among the new ideas they are working on are:
A mutual fund registered under the Investment Company Act of 1940 that delivers the returns of managed futures;
Passive indexes of U.S. and non-U.S. futures markets that will be run by an independent consultant;
An enhanced Goldman Sachs Commodity Index Fund strategy; and
An offshore futures return fund for non-U.S. investors.
Mr. Kaufman is a former partner with Mount Lucas Management Corp., Princeton.
Mr. Baker is a former vice president with SEI Asset Management Services, Wayne, Pa.
He was working at SEI to promote a fund based on the BARRA/MLM Index, which is jointly sponsored by BARRA Inc., Berkeley, Calif., and Mount Lucas. The index seeks to passively capture the returns of trend-following managed futures strategies.
Trilogy, based in Princeton, has about five employees, and hopes to add about five more, mainly in back-office and computer positions, Mr. Kaufman said.
The connections among the three founders go back much further than the formation of Trilogy.
Mr. Bearman is a former brokerage executive with James H. Olifant & Co. Mr. Kaufman credits Mr. Bearman with helping to bring Gifford Fong and John O'Brien into the investment industry. Mr. Fong is founder of Gifford Fong Associates, Walnut Creek, Calif., a research firm. Mr. O'Brien is a founder and current chairman and chief executive of Leland O'Brien Rubenstein Associates Inc., Los Angeles.
In addition, Mr. Bearman is Mr. Kaufman's uncle, creating some childhood memories for Mr. Kaufman that some could describe as unique.
Mr. Kaufman says Mr. Fong taught him how to play pingpong, and he can remember learning about the stock market and beta around age 8 from Mr. O'Brien, who sometimes stayed overnight at his house.
While initially Mr. Bearman will work on the marketing and administration side at Trilogy, very far down the road he might work on developing strategies using the cash, bond and equity markets for the firm, Mr. Kaufman said.
Mr. Baker said one reason Trilogy is working on a mutual fund is that research has shown the typical investor profile for aggressive growth mutual funds is virtually identical to that of the typical futures fund investor.
But because of their structural and regulatory differences, getting that investor into futures investment outside of the mutual fund structure is difficult, he said.
Trilogy, which is working with a mutual fund partner the founders didn't want to identify, will use structured products that would pay a return based on some managed futures gauge to comply with regulations that limit the use of futures in mutual funds.
All of Trilogy's products are predicated on the idea that futures markets can create returns for investors willing to capture the fee hedgers implicitly pay to hedge.
For example, an aluminum producer may be willing to trade a certain side of the market to hedge itself, even if it goes counter to market forces.
In an effort to improve on the BARRA/MLM Index, Trilogy's executives are negotiating with consultants to take over indexes that Trilogy will help develop that seek to measure passive returns in futures markets.
Trilogy's executives say because the BARRA/MLM Index had Mount Lucas' name on it, investors perhaps did not view the index as being an independent gauge of the market.
Another project - an enhanced GSCI product - would transfer the returns from an unleveraged investment in futures contracts on top of a long position in GSCI contracts. The goal is to get commodity returns boosted by a passive replication of managed futures.
Trilogy is also active in creating offshore funds, primarily for wealthy non-U.S. investors.