By Ginger Szala
When the JOBS Act is discussed in managed fund circles, it’s typically due to its elimination of the ban on general solicitation and advertising by capital raisers, such as hedge funds. Obviously that’s a big plus, but another part of the Act that gave a lift to private placement funds was the increase to 2000 in allowable accredited investment holders. Previously, going over 500 investors triggered onerous reporting requirements under the Securities Exchange Act of 1934. The JOBS Act was passed in early 2012, and signed into law in 2013. That timing was perfect for a team of investment experts who were looking to expand their product base. This is their story.
Joe Mazurek faced a challenge. Mazurek is president of Straits Financial, a futures commission merchant based in Chicago, and a division of CWT Group, a leading provider of integrated logistics and supply chain solutions, based in Singapore. The long-time futures industry veteran had helped launch and build the FCM for Straits in 2010, a difficult period as the market was still gyrating from the 2008 financial crisis and the industry was contracting. Despite the timing, Mazurek managed to assemble an experienced and trusted team to grow the firm and build up its client capital and reputation. With Straits Financial on a solid foundation, Mazurek’s higher ups now were asking: Where do we grow from here?
To answer that question, Mazurek gathered his team and discussed growth options: do they open a proprietary trading arm? High-velocity shop? Physical commodities desk? All these were good options, but Mazurek wanted to leverage the rich experience of the team in front of him: James Curley had run the futures groups at Prudential Securities, Paine Webber and E.F. Hutton, and Joe Randazzo also had been a senior manager at Prudential and Paine Webber. Mazurek too had been an executive at other FCMs, such as Macquarie Futures and PaineWebber. Together the trio had more than 100 years of experience in the business. Further, Curley and Randazzo had been successful at developing and launching managed futures products for a large client base. Straits, with 7000 client accounts, would be the perfect base to launch such a fund.
The environment was right as well: Dodd/Frank meant bigger firms were going through back office restructuring and retrenching. “Many people saw Dodd/Frank as a door closing, but we also saw it as a window opening,” Mazurek says.
Further, because the JOBS Act allowed a private placement fund to have up to 2000 investors, a fund could be offered to registered investment advisors, family offices and accredited investors without bumping the ceiling any time soon. And as the team’s knowledge base, and company, was in futures, they wanted a futures-only product. Okay, the team agreed, launching a futures fund was a perfect way to expand Straits’ growth, and a way to service clients. Now what was needed was a proper structure.
First, challenges had to be addressed: Futures funds, even private placements, have a reputation of high fees, mediocre performance and, with some, tax implications. How could they design a fund that reduced those problems and was the right vehicle for clients?
They reviewed other fund structures. Many were onerous and plagued with regulatory and fee issues. And though 40 Act Liquid Alternative Fund assets under management had grown significantly, there was a problem. In studying that structure as it pertained to futures funds, the main deterrent was the tax issue: 40 Actmanaged futures funds’ mandatory distributions tended to be taxed as ordinary income, as opposed to futures funds that fall under the 60/40 rule and lower tax rate.
Their experience told them that one of the most effective tax structures was to establish the fund domiciled in the Cayman Islands. At the same time, they established two feeder funds, one a U.S. private placement for U.S. investors and the other a Cayman Island company for non-U.S. investors.
“The reason we chose the Cayman Islands to locate the fund is we wanted to create a vehicle that was not taxed by the local jurisdiction,” Curley explains. “Second, we wanted to create investment vehicles for both U.S. and international investors and this structure affords us that ability.” It also allows them to leverage the strength of their introducing broker and registered investment advisor networks as well as their international branches and foreign introducing brokers.
One aspect they felt also was important to their clients was to provide a liquid product, which ruled out hedge funds, as many trading managers required two-three year investment lock ups. Their solution was monthly liquidity, solidifying the managedfutures fund route, but selecting the right traders was key.
There were strong opinions in the group. Having sold several multi-manager futures funds, Curley was of the mind they should go with a single advisor. Mazurek agreed: “Wechose to go with one CTA because when you have multiple CTAs, one’s profitability may be offset by the others’ lack of performance, but a client could still be required topay management and performance fees even if overall fund performance is down.”
They definitely wanted a CTA with a long track record that had showed profitability for a number of years. They zeroed in on Dunn Capital Management for several reasons: Dunn had a 40-year track record that had consistently impressive performance; in its WMA fund they traded 53 futures contracts, thus were well diversified; they didn’t charge a management fee, so only made money when profitable; the structure of the company was solid, complete with a succession plan; they traded only futures contracts with sufficient liquidity, and what Mazurek says was the piece de resistance was Dunn’s customer-centric mindset: half of Dunn Capital’s assets were made up of management, employee or friend/family money…so they had skin in the game.
Dunn Capital Management was especially attracted to Straits global distribution network. The partnership opens up new international investors to Dunn, and provides Straits the ability to offer its customer base a product that allows a $10K minimum investment in Dunn, one of the top global commodity trading advisors of all time. The WMA trend-following program has a 30-year track record, averaging 14% returns per year, and even performed well through the financial crisis. Aside from a few years, it has consistently outperformed the S&P 500 Index since 1995.
The Straits Financial Premier Fund I got all the permissions needed in November 2014 from the Cayman Islands government, and the firm began offering the fund Dec 15, 2014. They see this as the first futures fund for the group, with hopes of a sequel and beyond. They believe they’ve met the challenge of expanding Straits Financial as well as providing their clients with a superb product that not only has fees “very competitive to everything else,” says Mazurek, but provides access for RIAs, small family offices and accredited investors to Dunn Capital Management, which formerly may have been beyond their investment reach.
Ginger Szala is the former editor-in-chief and publisher of Futures Magazine Group. She has reported on and written about the global derivatives and managed funds business for more than 30 years. Today she is a freelance journalist, business writer and media consultant. You can follow her on Twitter @gingerszalaink or e-mail her at: email@example.com