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Your company has recently launched an energy-focused index, the Gardner Energy MacroIndex (GEMI). What do you believe is your niche in the fast growing hedge fund industry and how do you add value for investors?
Gardner has developed a unique niche by running active indexes in the global energy and commodity space. We developed a proprietary composition and selection matrix combining global market expertise and a trading mix of three strategic asset classes: (1) commodity price trading (futures, options, OTC and swaps), (2) public long/short equities, private equity and (3) structured finance (public and private debt). The specific mix of these three asset classes is reflected in Gardner’s proprietary MacroIndex principle and expressed in the family of Gardner indexes, a family of active performance indexes.
What added benefits do Gardner’s energy and commodity indexes provide to the investment industry in the already crowded index market?
Our clients are mainly financial institutions, such as private and commercial banks, pension and endowment funds, insurance companies and family offices. For such a demanding clientele it is important to deliver unique strengths and real differentiations. Such strengths are; a fully diversified global sector exposure (derivatives, equities and debt in the same product), solid and stable return parameters (above 10% net) with low volatility (below 10% standard deviation), good Sharpe ratio (above 1% annualized), high level of transparency and high liquidity (between 30 and maximum 90 days). All of our indexes are actively managed performance indexes versus passive management (equal, market or asset weighted), which are common in the industry. While an investor may find a specific sector index in each market sector, representing only a part of the sector (mostly through a price index), we provide exposure into the entire value chain with our proprietary MacroIndex composition and selection matrix.
Are there any capacity constrains in your investment products?
All of our index investment products have potentially unlimited capacity. In fact, more assets under management enhance the model, which we were able to prove principle in the past year.
In respect to the many commodity and energy index products available in the market place, why would an investor decide to invest into your index tracker fund and what kind of advantage would they have?
We provide an active rule based performance index, with a best in class composition and selection process. An investor gains an active exposure into the entire value chain and not just into a fraction of the sector such as just a passive price or equity exposure. Every investor has to decide for themselves if they want to have a more comprehensive sector exposure, such as into energy or commodities, in order to optimizing the diversification of their portfolio. Essentially an investor cannot afford to be passive about his investment decisions and therefore an active sector exposure makes a lot of sense. Furthermore, active index providers have often added insight into the micro- and macrostructure of the corresponding market. The risk/reward ratio of such an exposure is obvious, since integrating an enhanced index exposure within an entire portfolio allows them to take advantage not only of market beta but as well added alpha.
Can you explain the alpha advantages of your products?
By having a best-in-class manager composition and selection approach we can add alpha, while still benefiting from market beta, coupled with a protection to the downside through the blended asset class exposure. In essence we maximize returns and minimize risks. Our MacroIndex proprietary selection matrix does this. In short, the MacroIndex selection matrix is an investment solution that factors in all present and in the future expected market activities represented in prices, interest rates, and all additional aspects of manager investment strategies and market uncertainty at any given point in time. It reflects the present market exposures and the cumulative future market expectations and uncertainties, in view of the fact that the only real and productive way to respond to true market uncertainty is to spread all the risk that is diversifiable. That is exactly what the MacroIndex principle does. In my opinion, the best index is not necessarily the one which provides the highest returns with attributed high volatility, but the one which most accurately measures the performance of the style the index is designated to track and provides solid returns with acceptable volatility parameters.
Gardner’s activities have been relatively low- profile in the industry; could you explain briefly the history of the company and its activities?
Gardner’s core activities are split among three different companies: Gardner Group, Gardner Finance and Gardner International. Gardner Group’s main business is research and consultancy in energy, commodities and alternative investment products to institutional industry players. Gardner Finance’s main business is the design and management of diversified performance indices, index tracker funds, hedge funds and fund of hedge funds. And, Gardner International’s main business is representing the interests of Gardner Group and Gardner Finance with worldwide representational offices, such as in the US and Brazil.
What are the specific challenges your MacroIndex principle faces?
Asset classes are not homogenous and modern portfolio theory advocates diversification across asset classes, but for the most part is only achievable by combining exposure into several investment products at the same time. Our objective was to create a matrix of a balanced portfolio which provides price exposure, but takes advantage of the uncorrelated nature of the underlying asset classes, industry sectors & segments to minimize risk and optimize returns in one single product. Our proprietary selection matrix optimizes portfolio construction by reducing risk and optimizing return potential within the uncorrelated nature of combined asset classes with all the core strengths usually only a combination of several investment products could achieve, i.e. optimal diversification, optimal risk/reward ratio, low volatility, superior performance, high transparency and high liquidity.
This process took two years to perfect and as a result, the Gardner MacroIndex principle was developed, blending exchange and OTC price exposure, public long/short equities, private equities and public and private debt. We then worked with our initial joint venture partner, Credit Suisse, to successfully launch the first index, the Gardner Energy MacroIndex (GEMI), together with our auditors, Ernst & Young, and our administrator, DPM Mellon, which each had a crucial role in this process.
Energy and commodities have experienced a renaissance in the past years. Is it too late to invest into the energy and commodities sector?
My career started over 20 years ago in commodities and I never questioned whether one either should or should not invest into this sector. For me it was a natural diversification decision process that includes commodities exposure to any balanced and fully diversified portfolio. Commodities are a part of an optimized portfolio and it is very important to understand the energy and commodities space and that understanding comes only with experience.
A lot of hedge funds and investors, private and institutional, have jumped on the energy and commodity bull cycle, but it is important to understand that exposure appropriately. One needs to understand the different asset classes, the industry sectors and industry segments in order to be able to make a proper decision. Strategies such as mezzanine debt, master limited partnerships / royalty trusts / investment trusts, emerging markets, long/short equities, equity market neutral, relative value and directional trading have to be understood appropriately in order to assume the right level of risk/reward ratio. Chasing only total returns is risky in such a volatile market. A more refined investment strategy needs to be followed with the appropriate diversification and I believe an index tracker exposure wrapping a diversified range of investment strategies into one product can be the solution for it.
The energy and commodity markets have experienced a significant reversal this month. How does this affect your energy index, the GEMI?
Due to our unique asset class composition, our index will not experience such an abrupt value loss. That is supported through our larger structured finance exposure, presently around 40% of the overall index value, and most of our equity exposure has a long/short orientation including some fundamental CTAs. Therefore such an abrupt market reversal should not affect the index value as it will affect other energy and commodity indexes, which are either price or long equity indexes.
How do you see the further development of the global commodities market? Which other product types do you see evolving?
Globally our economies are growing, some at great pace, like India and China, our global social achievements are more and more linked to materialism, and therefore we won’t be able to disregard anymore the importance of commodities in general. Energy is gaining more political importance in the world and this is only the beginning. This political importance will spread as well into the other commodity sectors in the next 15 years. In the meantime the markets are going to be very volatile and therefore attractive for investors being able to profit from such volatility. Long-only commodity products will have more and more difficulty to generate returns and there will be a paradigm shift of looking at energy and commodities in general.
Most people believe that energy is merely crude oil and natural gas, but the sector is much more, like oxygenates, lubricants, weather, electricity, coal, uranium, fuel cells, wind, solar, and many others. As investors concentrate around the driving products in the energy and commodity sector, the less dominant products will become as important, like minerals and agriculture. Consequently Gardner has decided to launch the first investable index in April 2005 in the energy space, the Gardner Energy MacroIndex (GEMI) through a joint venture with Credit Suisse, and having at present closely to a half a billion dollars in the underlying tracker investment vehicles.
Soon we are going to launch the Gardner Commodity MacroIndex (GCMI), and naturally we are beginning to focus on the other commodity markets and are in development of other Gardner indexes to be launched in the coming years, like the Gardner Green MacroIndex (GGMI), the Gardner Agriculture MacroIndex (GAMI) and the Gardner Metals MacroIndex (GMMI), all with the same diversified asset class exposure in each of the individual sectors.
Company website / Index site: energy.macroindex.com
