Interview with KKM Armor Funds Portfolio Manager Luke Rahbari

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Luke Rahbari head shot

Q&As and Interviews

Interview with KKM Armor Funds Portfolio Manager Luke Rahbari

Shauna O'Brien Mar 05, 2015

Insights from Luke Rahbari

Luke Rahbari: There are many volatility products, but we feel most of those products fail to capture a significant amount of the volatility shifts in the market. The objective of the fund is to give investors the most efficient access to a long volatility product. This long volatility product can be used to hedge long equity and equity related portfolios such as an ETF or ETN. The ARMOR Fund (RMRAX) attempts to provide the most efficient portfolio insurance for investors. What type of investor would you say the fund is most appropriate for?

Luke Rahbari: Anyone that wants to be long volatility and have an experienced portfolio manager systematically trade and maintain an efficient volatility hedge. Most likely, this product will be used by RIAs looking to control the downside risk of clients’ portfolios and to give clients some exposure to volatility which continues to evolve into an asset class. What are the specific catalysts that will move the value of the fund?

Luke Rahbari: There are several catalysts that could impact the value of the fund. However, we feel the main influences are realized or near-term historical volatility coupled with market expectations. The levels of the VIX and how much volatility we see in the US equities markets will influence the fund value. However, remember, although market volatility and the VIX have a negative correlation (volatility tends to go up as the equity markets go down); we don’t necessarily have to see a falling market for volatility to rise. Current volatility levels are at some of the lowest points in the last 10 years. We feel the main driver for this low volatility regime has been excess liquidity, the central banks buying risky assets, but as these programs come to a close, and volatility normalizes, we can see a market that stays at these levels or even moves higher, with rising volatility expectations. Let’s take a look at the KKM U.S. Equity Fund (UMRAX) next. Can you explain to us the fund’s objectives and what assets the fund will be targeting initially?

Luke Rahbari: The objective of the fund is to offer investors the ability to invest in a broad diversified portfolio of U.S. stocks with enhanced diversification of an optimized allocation to the armor methodology or long volatility hedge. Over the long run, we believe this fund will offer investors better risk-adjusted returns. Seeking consistent returns, the goal of the fund is to increase the compounding effects by reducing the volatility exposure. Over the long haul we believe the KKM U.S. Equity Armor Fund (UMRAX) will perform as well or better than a simple buy and hold strategy. As well, what type of investor are you hoping to attract with the fund?

Luke Rahbari: This is geared towards any long-term investor including pensions and endowments that have a long-term view of the market and are looking for a better risk-adjusted profile to own the US equity markets. Finally, what are the main themes you feel investors should pay attention to as we head deeper into 2015?

Luke Rahbari: We are seeing a lot of volatility in major asset classes. Currency, Treasury, Commodities, high yield. The only place that we have not seen any real lasting volatility has been the US equity markets.

Volatility from one asset class tends to bleed into other asset classes. This is the same thing as saying “when things get bad, correlation go to 1”. Holding cash has been one way in the past to hedge out some of a portfolio’s market exposure, however, with interest rates below the current inflation rate this has not proved to be a productive or efficient hedge. This is why we feel owning an efficient volatility hedge will prove to be an effective way to reduce overall market risk.

For 2015, with all the volatility we are seeing in other asset classes and the end of QE, we think that US equity markets will become more volatile along with all other asset classes. Since there is very little volatility in the equity markets compared to other asset classes, the best way to own volatility or market insurance in any asset class is to buy equity volatility right now. The KKM ARMOR Fund (RMRAX) does that for the investor in an efficient manner. And if an investor is concerned about current market levels, but still wants to have long market exposure, we believe the KKM U.S. Equity Armor Fund (UMRAX) is a great alternative to just being long the market.

The Bottom Line

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions.

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