Huygens Capital, the robo-advisor and ETF strategist, has brought its tactical, risk-focused robo-advisor offering to market. They aim to provide clients exposure to US equities while striving to protect against severe equity market declines.
Walter Vester, chief executive officer of Huygens Capital.
Accessible to US retail investors through their website, the Huygens automated ETF-based investment offering uses in-house analytics to monitor daily market conditions and seeks to identify periods of favourable and unfavourable environments for equity exposure.
The strategies, available in three levels of risk, switch between US equity ETFs for “offensive” exposure when periods of low equity market stress are expected, and US government bond ETFs for “defensive” exposure. Clients are guided to the strategy which is appropriate for them through a series of suitability questions.
The Huygens offering differs from the robo-advisor model popularised by firms such as Wealthfront and Betterment through its tactical allocation strategy that uses short-term market indicators to time rotations between equities and bonds. “Most robo-advisors manage risk by constructing an initial, diversified, multi-asset portfolio for a client, and then maintaining that static asset allocation with periodic rebalancing whenever the portfolio deviates from it,” said Walter Vester, chief executive officer of Huygens.
“Our approach addresses a need not satisfied by today’s robo-advisors: giving clients US equity exposure in a tactical, systematic, risk-managed manner. We believe the key to growing our clients’ assets is to invest them in US equities while striving to protect against periods of high equity market risk.”
If successful, this strategy has the potential to drive superior risk-adjusted returns and back tested data (net of fees and versus the S&P 500) provided by Huygens supports this. It is imperative to acknowledge that at a 1.25% management fee (compared to Betterment who charge between 0.15% and 0.35% depending on account size), invested funds will face greater annual net performance headwinds compared to lower-cost robo-advisor offerings.
According to Huygens, their approach uses quantifiable measures of institutional money manager sentiment, such as patterns in the price of US equity hedges, to identify periods of likely misalignment in supply and demand for US equities. These measures are then used to assess if next-day equity market volatility is likely to be so elevated that the risk of severe declines outweighs the potential for gains. Because equity market sentiment can change quickly in response to changes in economic, political, or other factors, the system re-assesses conditions each day.
“Our system is designed to give clients exposure to equities most of the time, but to switch to defensive positioning when we determine that the risk of downside volatility exceeds the potential for gain. When our system determines that the risk of downside volatility has diminished, it switches our client portfolios back to offensive positioning,” concluded Vester.