Tech Preview: Compare Fees with our Advisory Fee Benchmark

Advisory Fee Benchmark

See how your firm compares against other advisors using Orion when you utilize the new Advisory Fee Benchmark in Trends. Coming soon!

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Why Hedge Fund Managers are Moving to a Registered ’40 Act Mutual Fund

By Vicki Todd, Senior Vice President, Fund Accounting

Imagine yourself as a new investment manager. Being new to the investing world, you begin with limited capital and decide to start a hedge fund since they are less expensive to launch than a registered ‘40 Act mutual fund. Your hedge fund does well, but raising capital is difficult. First, you have to find high net worth individuals who are willing to put their trust and hard earned money in you, not only in the form of an investment, but in potential 2 and 20 fees as well. Furthermore, these investors are usually limited to a certain percentage of illiquid investments in their portfolios. Since the hedge fund has monthly valuations, it is considered illiquid, which limits its distribution to these high net-worth investors.

So, what should investment managers with hedge funds do? Find a partner with capital that can assist in converting your hedge fund into a mutual fund! Not only can the right partner provide capital, but they can also share knowledge and expertise with policies and procedures to help guide you along in the registration process.

Registered ‘40 Act mutual funds offer a larger distribution base with fewer barriers of entry for the average shareholder. By converting to a mutual fund, the hedge fund manager can bring over their track record from the hedge fund and begin to attract new investors. The distribution channels available for mutual funds allow them to reach a greater number of people.

A mutual fund can offer a low or even no-minimum investment, daily liquidity, and increased transparency into the funds’ investments. Those investors who have a limit on their illiquid holdings can now invest in the mutual fund because of its daily liquidity. As Jacob Pacini, Co-Founder and Chief Investment Officer for Pacini Hatfield Investments, said when he launched his hedge fund, “I couldn’t be in my own fund because the barriers were too high.” He recently partnered with Day Hagan Asset Management to make the switch from a hedge fund to mutual fund. Now more of his friends and family can participate in his investment strategy in the mutual fund!

So, why convert to a mutual fund from a hedge fund? It offers a much larger audience with more distribution options, daily liquidity, transparency, stronger regulations to protect investors, and fewer barriers to entry for the shareholders among other benefits.

Learn more about mutual fund restrictions and the ’40 Act here.

7140 GFS-2/9/2017



CLS is a Unique Investment Manager

Man analyzing financial data and charts on computer

Content provided by Rusty Vanneman, CFA, CMT, CLS Chief Investment Officer

At CLS, I like to think that – We are Unique. We are Experts. We are Nice.

As for being unique, I was able to get even more evidence supporting that from the latest Brown Brothers 2016 U.S. and European ETF Investor Survey.

Before we get to the survey data though, as we already know, the way we build balanced, diversified portfolios is unique in the industry, as we build and manage portfolios strategically by managing to target risk levels instead of targeting asset allocations. It’s a key and defining – and important – twist to building multi-asset portfolios. It allows us to actively manage the portfolios – adjusting to changing risk and return expectations – and still be able to deliver reliable and consistent portfolio behavior.

The survey, however, got across the point that the ETFs that we select are also unique for the industry. In short, our portfolio holdings look different – a lot different – than what our competitors typically buy.

First and foremost, we are an enthusiastic user of “smart beta” ETFs (iShares® Smart Beta ETFs – The Power of Factor Investing‎). Currently, our portfolios are nearly 50% smart beta. Less than 20% of ETF strategists have exposure even above 20%. Over 50% have 0% exposure. CLS is definitely different.

Second, actively-managed funds make up about 10% of CLS’s AUM (assets under management). The industry average is about 1%. Again, CLS is also definitely different.

Third, regarding currency-hedged ETFs (meaning we take no currency risk as everything is hedged back into U.S. dollars), our holdings in currency-hedged ETFs is currently 15-20% of our international holdings.  That is above the industry average, which is below 10%.   Nearly half of ETF strategists have 0% exposure.

But there’s more.

CLS is clearly unique relative to other ETF Strategists in how we select ETFs. In short, what we look for in an ETF is different. What we emphasize and what we don’t is notable.

From the same survey mentioned above, Brown Brothers surveyed investors on the seven attributes listed below. How does CLS compare? (The CLS data is taking an equal-weighted average from surveying our own Investment Team):

But first, before we get to the list, there are two variables we ALWAYS look at and emphasize first that weren’t even included in the survey:

  • Expected risk of an ETF – measured via our Risk Budgeting Methodology.
  • Expected return of ETF – looked at from multiple perspectives, but most prominently from our propriety “CLS Score” which looks at multiple variables including valuations, momentum, costs, changes in risk, and fundamental and economic data.

Okay, now the Brown Brother’s survey list and how CLS differs:

  • ETF issuer: While we think this is important, and we sincerely value our relationships and support from ETF issuers, we feel this is the least important of the 7 factors – and far less important than what many ETF consumers look for. It does go to show the value of branding though.
  • Exact exposure of underling holdings: Meanwhile, we do consider this THE most important attribute to understand about an ETF. While this was also the top ranking for the average investor in the survey, at CLS we put far more emphasis on it.
  • Tracking error: How closely does the ETF track its underlying holdings? At CLS, we think this is extremely important, and we put far more emphasis on it than most investors. To us, if an ETF doesn’t track the holdings that we expect it to follow, that’s just sloppy and a big knock against the attractiveness of the fund.
  • Expense ratio: This is the second most important variable for both CLS and for the ETF investors surveyed. How we differ – we put less emphasis on it. Why? See the next attribute.
  • Trading spreads: This refers to how well an ETF trades. This can be nearly as important – if not more important – than the expense ratio. At CLS, we put tremendous attention on this (it’s even a key factor in the aforementioned CLS Score) and a lot more than the average ETF investor.
  • Tax efficiency: To the average investor, and to CLS, this is a given positive attribute for ETFs. There is really no significant difference in how CLS looks at it compared to the average investor. If anything, CLS puts slightly less emphasis on it.
  • Historical performance: To many investors, this is one of the more important variables when picking an ETF. At CLS, while we do look at historical performance, it’s actually near the bottom of the list for us.

Bottom line, when it comes to picking an ETF, we want to know its underlying holdings, that it tracks those holdings well, that the ETF is priced right, and that it trades well. If we find an ETF in an area of the markets that offers potentially attractive expected (not historical) risk-adjusted returns, then it’s worthy of inclusion in our portfolios.

In sum, CLS is a unique money manager – in a variety of ways.

Stay balanced.


Responding to Due Diligence Questionnaires

Financial intermediaries conduct various levels of product due diligence to gain a better understanding of the investment firm’s Competitive Edge. Due diligence questionnaires cover two key areas; firm and product. Due diligence teams are seeking to understand the investment advisor’s philosophy, processes and operational support to best determine business viability and product continuity. The following is a general guideline, created to prepare you in responding to a due diligence team.

“The strongest steel is well-founded self-belief. It is earned, not given.”
– Coach John Wooden


Question Why does the
due diligence team
ask for this information?
How to highlight your
Competitive Edge
Present your firms overview, including history, inception date and key members Learn the origin of the company, who started the firm and why the firm was founded.  Looking for evidence of industry and investment strategy management experience. Express what makes the organization unique – your history, story and reason why you manage money.
Outline your current ownership structure To find interested parties that may influence accountability, company liquidity and may provide potential investment in the firm’s future growth.  For example: private ownership, employee owned, public, corporation or LLC, LP. Validate alignment of all interested parties that will continuously support the firm and the investment management goals.

Key points:

  • Decision making hierarchy
  • Past growth and future growth opportunities
  • Succession planning
Provide the total number of employees and detailed descriptions of key personnel, including number of years of experience and average tenure for each professional in their respective roles Investigate the organization’s supportive infrastructure and determine ability to sustain and manage long term growth.  (Ratio of personnel to AUM, complexity of the strategy and client sales support may influence a due diligence team’s rating). Key points:

  • Total number of firm employees
  • Total number of investment professionals (analyst / traders / portfolio managers)
  • Sales, marketing and client service
  • Administrative: legal, compliance, risk management and operations
Are investment professionals compensation tied to performance of the investment strategy? To learn the compensation structure allows the due diligence team to gain insight on the collaborative nature of the organization to drive consistent results. Focus on competitive and performance driven environment to best demonstrate alignment with the shareholder. Provide insight to how compensation is determined and processed (i.e. options, equity, bonus, etc.)
Provide firms personnel turnover over the past five years and rationale for the turnover Determine the stability of the firm personnel and the consistent implementation of the firm’s core philosophy.  For investment professionals, low turnover is a key factor in determining the validity of the historical track record and tends to demonstrate product continuity. Proving team stability and continuity by demonstrating:

  • Years of experience
  • Number of professionals that contribute to the investment strategy
  • Rationale for any turnover of research and investment management team
  • Provide succession plans – cultivating and advancing talent
View firms assets under management (AUM) for the past 5 years Exhibit the scalability of the firm and the strategy to determine potential risk to the investment strategy implementation and sustainability of the business development opportunities. Key items of consideration are product/firm capacity and liquidity constraints.  Describe components of your firms AUM:

  • Total firm
  • By vehicle; LP, SMA, Funds
  • Discretionary vs. Advisement
  • If low assets or high turnover, describe the fluctuation and what is being done to minimize potentially large swings.



Question Why does the
due diligence team
ask for this information?
How to highlight your
Competitive Edge
Illustrate your investment philosophy Recognize the overarching core beliefs that will impact the strategy and investment process implementation. Present your firms core beliefs that drive the strategy implementation. For example: top down or bottom up viewpoints, quantitative drivers or qualitative fundamental factors, macro or micro viewpoints and or market trend followers.
Detail the firm’s investment process Explore the process for portfolio construction, with emphasis on key decision makers and buy and sell disciplines to ascertain replicability of the strategy to drive consistent performance. Outline decision making hierarchy and provide detailed security selection process that influences portfolio allocation decisions.
Include portfolio allocation rationale Discover the guardrails for minimum/maximum holdings at the security, sector and industry level with emphasis on risk management tools. Emphasize the consistency of the investment process by highlighting how the firm generates alpha, i.e., when there would be underweights and overweights in the portfolio, any benchmark considerations and provide rationale for cash holdings.
Showcase your performance history Seeks to understand how the investment management team has performed vs the benchmark and designated peer group since inception and for key time periods: 1, 3, 5+ years. Highlight respective vehicle performance and history managing assets in the investment style.  Provide examples of “stressed” time periods and how your strategy performed.
Define risk management policies and procedures To understand the firm’s risk controls for three key areas:

  • Operational and trading support
  • Books and records / information security
  • Succession planning


Illustrate disaster recovery plans.  Provide procedures for safe keeping of all sensitive information and how client privacy is protected and monitored against cyber security attacks.  Discuss contingency plan should key decision makers leave the firm.  Highlight succession plans with emphasis on cultivating the next generation of talent.
Portray the sales and marketing support that will drive sales growth opportunities Seeking to understand how the firm will grow the strategy assets over time. Feature your short term and long term marketing plans that may impact your sales over time.  Emphasize on what circumstances would increase your sales efforts.  Focus on target market, distribution activity and personnel.


DISCOVER – Gain a deeper understanding of how to highlight your Competitive Edge in the due diligence process

PLAN – Create an off the shelf due diligence questionnaire for your firm and strategy

PREPARE – Work with your Strategic Relationship Manager to determine the intermediary opportunities

ACT – Proactively provide the questionnaire when soliciting new opportunities




Learn How to Incorporate Insight, FIX, and More into Your Firm

In today's Orion Weekly, we'll dig into incorporating our newest technology, like our upgrade to the Insight app, as well as cover plenty more.

The post Learn How to Incorporate Insight, FIX, and More into Your Firm appeared first on Orion Advisor Services.


Here’s How to Add FIX Execution to Your Trading Workflow

Orion's trading and rebalancing tools can provide efficiency and time-saving steps, like adding FIX execution to your trading workflow.

The post Here’s How to Add FIX Execution to Your Trading Workflow appeared first on Orion Advisor Services.


Service Oriented Software Development

By Scott Spratlen, Senior Vice President, Technology

I have always loved technology.  Even in grade school, I was doing basic (that’s the programming language name) programming on my Atari.  Typing code into the console, with one joystick and one button. Those were the good ol’ days, it took forever for the simplest program.  While I was working toward my Bachelor Degree in Computer Science I took a class that required building a PC from scratch.  Not assembling a PC with parts, but a bread board, wires, and switches.  While this home-built-PC did nothing more than rudimentary math, I became aware of all of the inner workings of what makes a computer actually work.  It boils down to 0s and 1s, continuous on and offs that cycle and combine to make some incredibly complex technology.  If one of those 0s or 1s aren’t set just right, then the instruction execution goes awry, and the computer doesn’t do what we think it should.  All technology professionals have been in that position before.

As we’ve begun this New Year, I have been reminded of that memory and how similar that is to a service-oriented development team.

A traditional development team creates a product that the company then sells.  Therefore, the development team has a certain visibility.  But, at a company like Gemini, our product is essentially the service that’s provided by our amazing people.  And, our Development Team’s job is to make these people as efficient and effective as possible.  With that, we are typically invisible to our clients, and that’s a good thing most of the time.  We are like a sound tech at a large concert: you would only really recognize our existence if there was negative feedback or bad sound, which is not a good thing.

Don’t misunderstand me, we are happy to directly interact with both our internal and external customers.  Our job truly is to provide support and products that best service the company.  The developers of a service-oriented company actually interact a lot more with stakeholders than a traditional development team.  Traditional development teams would typically communicate through an automated ticket system, and deliver to a business analyst or project manager, who in turn would hand over the project and interaction with the stakeholders.  But in our arena, there are lots of requests from clients and new requirements due to changes in regulations. We must be agile and available to interact directly.  There isn’t time to build and deliver in long cycles.

We do this by implementing a version of agility called Kanban.  It was originally developed by Toyota in the 1940s. Toyota’s focus was to eliminate waste (including time) and limit work in progress (WIP) by focusing on efficiencies and linear processes.  It works great for a high volume of small projects.  This process allows us to continually reprioritize and keep up with shifting demands while delivering automation, process, and product improvements in small iterations.

There are some challenges that go with a service- oriented development department.  A stereo-typical developer does not typically enjoy all of the personal interaction and shifting priorities.  It requires a personality type that can communicate clearly with stakeholders and can handle the constant shifting of priorities.  At Gemini, we have some of the best of the best developers that accomplish this on a daily basis!

We like to think of ourselves as that sound tech at a concert, or even the 0s and 1s that make up the computer.  Even when there is that rare occasion of feedback at the concert, or the computer isn’t doing exactly what you want it to do, we learn from those instances and grow as individuals and as a team. We are always working to provide the best possible service (both products and process improvements) needed to enable the amazing product at Gemini (its people) to be the absolute best they can be.




CLS Talks Risk Management With Paladin Consulting (6 of 6)

Paladin Consulting Company’s Co-founder, Art Lutschaunig gives CLS’s Senior Market Strategist, Joe Smith, CFA, a two part answer to the importance of partnering with a firm like CLS.


Eclipse Is Finally Here!

Know what's coming this weekend in the first Orion software update of 2017. Plus, join the Eclipse movement and learn more about another new Fuse award winner.

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Positioning For Growth

Are You Ready For Distribution?

The Gemini Companies (Gemini) distributor believes successful marketing strategies require a thorough self-assessment during the distribution planning phase and frequent reviews to adjust accordingly. During strategy planning, investment advisors should seek to understand how to access their desired target client with focus on product placement requirements and expected activity. Gaining such understanding will help determine the best course of action to implement your distribution strategy and focus your time and resources in markets that are open to your fund opportunity.

Gemini developed the distribution growth cycle model to assist investment advisors in matching their current distribution characteristics with potential opportunities, allowing managers to tactically develop their distribution plan to match. Gemini’s distributor identified four distribution phases: Raising Capital, Emerging Manager, Growing Manager, and Established Partners. Each distribution phase has distinct characteristics, challenges, and opportunities. The phases are defined as:


Raising Capital – Investment advisors that have less than $250 million in firm assets under management and a fund with less than $100 million in assets. Fund may have less than a 1 year track record.

  • OBJECTIVE – Funds at this phase are seeking to raise capital and raise awareness of their strategy
  • CHALLENGES – Short track record, no Morningstar rating, conservative sales and marketing budget
  • OPPORTUNITIES –Tactical, geographic sales activity within platforms, that are open to listening to a new story

Emerging Manager – Investment advisors with approximately $250 million to $1 billion in firm assets under management and a fund with less than $200 million in assets. Fund may have a 1 to 3 year track record.

  • OBJECTIVE – Firms at this phase have garnered success raising assets and capitalize on that success to elevate awareness of their strategy
  • CHALLENGES – Less than three year track record, at the cusp of Morningstar rating, moderate sales and marketing budget
  • OPPORTUNITIES – With a young track record, broaden product placement within existing platforms and potentially expand to additional platforms. Increase activity in preexisting platforms through meeting participation and creating value add (i.e. intellectual capital)

Growing Manager – Investment advisors with over $1 to $5 billion in firm assets under management and a fund with more than $200 million in assets. Fund track record is 3 to 5 years.

  • OBJECTIVE – Firms at this phase have garnered success and are seeking deeper and broader platform placement opportunities
  • CHALLENGES – Established competition, strategic sales and marketing budget
  • OPPORTUNITIES – Broaden product placement within preexisting platforms, seek new distribution markets, and increase sales and marketing activity at the local, regional and national levels

Established Partners – Investment advisors with over $5 billion in firm assets and with a 5 plus year track record.

  • OBJECTIVE – Firms at this phase have a solid footprint in the investment community, may be seen as a market leader in their space. They are seeking to deepen relationships and product penetration across programs and platforms
  • CHALLENGES – Established competition
  • OPPORTUNITIES – Increase activity in preexisting platforms, create new strategies, seek allocations within recommended programs and seek new platforms open to a proven story







Northern Lights Distributors, LLC