RXR Capital Management was founded in 1983 by Mark Rosenberg as one of the original cutting edge systematic diversified trend following commodity trading advisors of the day. It was the beginning of a long and profitable run that appeared to be ending last year, but has been resurrected as Ridgedale Advisors.
RXR distinguished itself by offering a unique blended investment that included its momentum-based trend following strategy with convergent hedge fund type strategies.
“The convergent approach works most of the time but there are periods when markets become irrational and prices move far away from fair value and that is when the divergent side takes over and does well,” says Ridgedale CEO and co-Chief Investment Officer Paul Lucek.
Rosenberg believed that diversification through allocations to both divergent and convergent strategies would produce superior risk-adjusted returns. And he was proven right as their Multi-Strategy Program (MSP) has produced an average annual return of 7.39% with an annual standard deviation of 7.03% from September 1986 through March 2016. That is when SSARIS Advisors, formerly RXR, closed shop. But like a Phoenix rising from the ashes, it reopened in August 2017 as Ridgedale Advisors.
In 2001, State Street Global Advisors bought a 60% stake in RXR forming SSARIS Advisors. The strategies continued to perform well and they added additional outside managers but culture and regulations made the structure difficult. “With Dodd Frank it became impossible for a Fed-governed bank to be a majority stakeholder in a hedge fund. They wanted to shift the relationship and offered to buy us out,” Lucek says.
Instead the employees decided to purchase back a controlling interest in SSARIS. It sold off its fund of funds business and would run its MSP and its Multisource Active Commodity Index (MAC), which it launched in 2007.
However, in separating from State Street, SSARIS lost $800 million in assets. “Our external clients were seeing all these assets leaving and we hopped ahead of that and returned capital, took a break, reorganized ourselves, shed the SSARIS name and formed Ridgedale,” Lucek says. “We launched with $25 million with one client from Houston [and] have had positive feedback from all our clients that we returned capital to.”
The allocation is to its MAC program, which tracks the Bloomberg Commodity Index and seeks to generate active returns by taking calculated risks around the benchmark. “It provides substantial Alpha over the index,” Lucek says. “We do that by using a convergent divergent approach. With one half we use a Markov regime switching model and a backwardation model and over/under weight exposure on 22 commodities, that is convergent return stream. The other half of the portfolio is our typical trend following and momentum approach.”
The strategy has worked, as every year except 2009 it has outperformed the Bloomberg Index. Ridgedale offers clients the ability to only invest in the alpha from the MAC program by shorting the index in a separate account so clients are only exposed to the alpha produced if they don’t want the broad commodity exposure.
In the MSP program risk is split 50/50. Both convergent and divergent algorithms were initiated by Rosenberg in early 1980s, but that doesn’t mean they aren’t constantly looking for improvement. “We are always looking at new approaches,” Lucek says. “We have models that are sitting on the sidelines, some of our short-term momentum models have lost efficacy over the last two years so we are replacing those.”
“The key to divergence is that it hedges the portfolio in times of market stress,” he says. “MSP is one of the only programs that had double-digit returns in 1987, 1998 and 2008: The stock market crash in 1987, the Asian currency crisis and Russian debt default in 1998 and of course the global financial crisis in 2008.”
Despite their long history, Ridgedale is open to new structures. “We are agnostic about whether the client wants a separately managed account, or a retail client wants 40 Act. Mark and I think of it as MSP. We can deliver it through separately managed accounts, we can deliver it through private placed funds we can deliver it through principle protected notes,” Lucek says.
When we spoke with Lucek, he was talking to a pension fund about providing an allocation from its emerging manager portfolio. “We are being interviewed by an emerging manager plan, we may be the oldest emerging manager out there,” Lucek adds.