The nine-year equity bull run has brought cheer to many investors, but not so much for those shops looking to short the market.
San Francisco-based liquid alternatives boutique Broadmark Asset Management is no exception. However, co-chief executive and chief risk officer Rick Cortez believes the firm’s mix of long and short positions is about to come back into fashion, as being long-only equities at a time of intense monetary tightening and market overvaluation might prove to be unwise.
Cortez has been with the firm since 2009. Back then, its approach was particularly successful in the aftermath of the 2008 financial crisis.
‘That’s our philosophy. In a way, it’s the opposite of long-only because the majority of long-only people try to hit the home runs, but we are trying not to get out. We are trying to manage downside risk,’ he said.
Broadmark was set up with this express aim in 1999 by Cortez’s co-chief executive and the firm’s chief investment officer Chris Guptill.Although Cortez did not join Broadmark
for another decade, it was not for lack of being asked.
In 1999, Cortez, was working at Prudential Financial. One day, he went to meet Guptill, then a liquid alternatives portfolio manager at McKinley Capital Management, to see if he could bring him onto Prudential’s platform.
At the time, Guptill was leaving McKinley to start his own firm and asked Cortez to join him in the new venture. Cortez declined, opting instead to take a new role at Goldman Sachs. A decade later, he finally took Guptill up on the offer and made the move to the boutique.
On the move
Broadmark got its start from the California Public Employees’ Retirement System, which allocated $100 million to get it off the ground.
In its early days, between 2001 and 2009, Broadmark ran private hedge funds, charging investment fees as well as a percentage of any profits.
This business came to an end in 2009 as investor appetite for hedge funds and funds of funds declined rapidly in the aftermath of the crash. But with the support and financial backing of Forward Management – then largely an arm of the family office of billionaire investor Gordon Getty – Broadmark moved into the retail market.
Today, Broadmark has three core offerings: Tactical Growth, Tactical Plus and an additional overlay strategy.
All three can be accessed as retail and institutional managed accounts. The first two are also available in mutual funds via the $401.8 million Salient Tactical Growth fund and the $31.3 million Salient Tactical Plus fund, which Broadmark subadvises.
Salient, like Forward Management, now has a stake in Broadmark.
Dating back to November 2001, the Tactical Growth strategy is Broadmark’s flagship offering, managing equity market exposure through the use of ETFs and other index-based instruments.
Meanwhile, the Tactical Plus strategy is more aggressive and primarily invests in equity-based futures, ETFs and options, using leverage tactically when opportunities arise.
The strategies follow the firm’s tactical investment process, which rejects a traditional buy-and-hold approach in favor of what Cortez calls Broadmark’s ‘four pillars’: valuation, monetary policy, sentiment and momentum.
For Cortez, the first three pillars are qualitative in nature, while the final pillar is a quantitative assessment of the volume and breadth of the momentum.
Once these assessments have been made, the firm’s investment team decides its market exposures on the basis of the risk/reward characteristics. Cortez added that the strategies try to align with economic and business cycles, tactically phasing into and out of major equity cycles.
‘One of the core philosophies of Broadmark is that if you can avoid losing more than 10% over time, you typically only have to capture about a third of the upside when the market goes up to beat the market,’ he said.
‘So what you are doing is approaching the markets a little differently instead of trying to hit a home run so to speak, trying to find the next Amazon or Google.’
With many managers predicting a sharp correction in 2018, Cortez’s safety-first approach could help Broadmark bat above the average over the next 12 months.