Cole Asset Management (CAM) was formed in 2004 as an investment advisor, and its first proprietary product, Tellus Natural Resources Fund, a fund of funds dedicated to the commodities and natural resources sector, was launched in February 2005. Brad Cole has more than 20 years of industry experience, including ten years on the floor of the CME trading futures and options, then as part of a successful Chicago-based CTA. Developing and dissecting trading approaches has been at the heart of Cole窶冱 investment career since 1980. Rian Akey, COO, has been working with CAM for more than seven years, primarily in a research and due diligence capacity.
CAMS shares portfolio management responsibilities with a sub-advisor, Chicago-based AlphaMetrix Investment Advisers. AlphaMetrix is an alternative investment advisory firm that specialises in trading manager research, due diligence and developing technology for risk management and quantitative analysis purposes. They advise over US$350 million in assets.
From AlphaMetrix, Aleks Kins has asset management experience as a member of the alternatives group at Carr/Indosuez and Ramsey Quantitative Systems Inc, where he helped to build the Emerging CTA Index, a multi-advisor product that focused on emerging commodity trading advisors. Jon Stein was previously the chairman of the investment committee for Efficient Capital Management, one of the largest multi-advisor CTA managers in the world, and before that he was with Rotella Capital Management.
The Tellus portfolio gained 11.21% net of fees for the period from February 2005 to December 2005. In 2006, the portfolio is up an estimated 17.39% year-to-date through July. The compound annual rate of return from inception through July 2006 is 19.61%, with annualised volatility of 8.07%.
- Could you outline the key features of the Tellus Fund of Natural Resources Funds, such as terms of liquidity and redemption, incentive fees charged etc?
Tellus is set up in a master/feeder structure, with a Delaware LP entity serving as an onshore feeder and a Bahamian corporation as the offshore feeder. Tellus Master Fund Ltd is a Bahamas-domiciled entity. The funds provide for quarterly liquidity with 90 days窶兪notice, a 1.5% management fee and a 10% incentive fee.
- One of your stated investment guidelines is to diversify and cap your exposure to any specific commodities sector at 40%. Could you elaborate on your allocation methodology and the rationale behind it? How frequent and dynamic are changes to these allocations?
In developing the portfolio 窶伝and this goes back more than two years now 窶伝we made a very concerted decision that we wanted this to be a commodity fund and not an energy fund. It was clear to us that within this space there is an abundance of energy managers, many of whom have institutional quality infrastructure and capacity to manage a significant volume of assets. Our view is that the supply/demand drivers that are getting so much attention and focusing interest on the natural resource space are not energy-specific. That is, the macroeconomic story is much broader than being merely an energy story, and creates opportunities in everything from metals and grains, to soft commodities and exotics. By forcing diversification through sector constraints we are attempting to provide broad exposure to a diversified mix of these opportunities. We feel that there are actually more ways for an investor to gain pure energy exposure, if that窶冱 what he wants, than there are ways for an investor to gain diversified resource exposure, especially via actively managed strategies.
The idea here is not to be making large-scale sector calls, but to provide ongoing exposure to a diversified mix of resource strategies. We do review our sector exposure on an ongoing basis in relation to our views on market fundamentals, but the changes are more subtle and likened to tilting than outright re-balancing. The goal here is to provide ongoing access to a diversified opportunity set, with the best managers and traders from each sector.
- Do you foresee any significant shift in your sector exposure in the near term? Why or why not? What are the typical holding period of an investment and turnover of the portfolio?
We have taken a strong interest in agricultural and soft commodities, particularly insofar as markets like corn and sugar are linking more than ever to what is happening in the energy markets. We have broadened our exposure here to managers we feel are well-positioned to digest and act on these types of fundamentals. Ideally, we would anticipate low turnover and long holding periods; we are not involved in this space to trade managers or chase returns based on near-term sector views.
- It is also stated in the mandate that Tellus has a half-and-half exposure to directional and relative-value/pair-trading plays. In your experience, was there any discernible pattern between performance and the style employed? What other factors go into making the style allocation decision?
Along with the sector diversification mandates, this is another key to portfolio structure that we feel is unique to Tellus. Within each sector and even each market, it is clear to us that directional market timing is only one source of alpha. The number of relative value type trades is voluminous, whether you are looking at trading along the futures curve, arbitraging the future to the physical, inter-market spreads, etc. Because of all of the attention to the long-term supply/demand issues in the resources space, we have felt like there is so much focus on the directional side of the equation. We believe in many of these long-term macroeconomic factors about commodity prices increasing, but we also don窶冲 want to be reliant upon gold hitting us $900/ounce to have a profitable portfolio. This is where the relative value portion of the portfolio contributes. From May-June 2006, when metals markets like copper and gold were selling off, our metals positions were profitable in the aggregate, largely due to relative value positions. We see months where there is a very clear pattern between directional and relative value strategies in the portfolio, and the balance in our portfolio has absolutely smoothed our return stream.
- Is the fund as diversified geographically as well? What is the current regional breakdown of Tellus窶兪assets?
The great majority of assets are deployed in North America and Europe, with small pockets of exposure coming outside of those regions. We are interested in broadening exposure outside of these areas, but find that the real core of activity in the space is coming from these parts of the world.
- What is the Tellus fund窶冱 competitive edge over other funds of funds allocating to natural resources?ﾂ
