Three hundred years after Christiaan Huygens published the first treatise on the mathematics of probability, a financial services firm is using his name and theories for a new robo-advisor.
Huygens Capital CEO Walt Vester said his automated investment product monitors the behavior of institutional money managers and the price they are willing to pay for hedges to predict whether market conditions the next day will be favorable or unfavorable for equity exposure.
If the Huygens robo predicts low equity market stress, it automatically puts portfolios on the offensive with equity index ETFs. If it expects high market stress, it puts assets into a defensive portfolio of U.S. government bond index ETFs.
“Robo advisor generation 1.0 developed a model that delivers value to their clients, offering a very straightforward way to shop for advice at low cost and straight forward exposure to asset classes,” Vester said, calling his “tactical, risk-focused robo advisor” a part of generation 2.0 that has the convenience of robo-advisors but with more advanced investment strategies.
“We know there are clients that want equity exposure with downside risk protection.”
Huygens offers products for conservative, aggressive, or middle-of-the-road growth. The difference between the three is the amount of equity exposure when the robo puts portfolios on the offensive.
Vester drew on a background in computer science – he developed algorithms for the military before making the switch to finance – to develop the robo-advisor, originally to manage is own money before realizing it could be a commercial opportunity. Huygens Capital has offered it to RIAs since the summer, and announced a direct-to-consumer version on Monday.
A retail account requires a minimum investment of $20,000 and charges a 1.25 percent annual management fee, which is well above other, more popular robo-advisor platforms.
Timothy Welsh, the president and founder of Nexus Strategy, said the high pricepoint could be a non-starter.
“Tactical human managers charge that, so where is the automation discount?” Welsh asked. “The whole point of a robo-advisor is to lower costs through automation and pass the benefit on to the client. Otherwise it is just a gimmick.”
Vester rejected that notion and said all advisors are active managers in some sense.
“Even rebalancing a portfolio automatically when it deviates from a set allocation; that’s active. You’re in there trading. Active can beat pure passive,” Vester said.
“People think they can hire an advisor to create and stick to a long-term plan, but behavioral patterns are just so strong that even when they think they are committed, they crack,” he added. “We take behavioral bias out of the picture entirely and manage based on data. Data shows that managing in a certain way can produce superior returns over time.”