Victory Capital, a "multi-boutique" investment firm with more than $63 billion in assets under management, has moved to acquire derivative asset manager Harvest Volatility Management, a fund manager specializing in options-based investment strategies. The $300 million deal, which was announced on Sept. 24, is the latest example of investment managers targeting derivatives markets as an alternative source of returns.
Harvest was founded in 2008, and has grown to about $12 billion in assets under management. The New York firm specializes in using equity index options for yield enhancement overlay, risk reduction, alternative beta and absolute return investment strategies.
The trend towards derivatives-based investment strategies has been driven in large part by the recent push towards passive management strategies, and the resultant decline in fee structures caused by low-cost index funds. Alternative investment strategies that deploy derivatives often command higher margins for asset managers, and involve active and tactical strategies that cannot easily be replicated by passive vehicles.
In a conference call after the purchase was announced, Victory CEO David Brown told analysts that alternative investment options are "in high demand with our clients" and that alternative strategies are attractive to Victory because they are "neutral to changing market conditions, and unlikely to be disintermediated by passive products."
Spun out of regional bank KeyCorp. in 2013, Victory has grown both organically and by acquisitions. Assets under management have increased from just $18 billion five years ago to over $63 billion at present. Ohio-based Victory raised about $140 million in an IPO earlier this year, in part to fund continued growth.
Victory is not alone in its quest to add alternative asset offerings to its portfolio. There has been a surge in recent deals across the alternative investment space. A review of asset manager transactions in 2017 by investment bank Sandler O'Neill & Partners LP showed that alternatives deal activity reached 67 transactions in 2017, an increase of 40% over the previous year and the highest level since the financial crisis. A key category of these alternative investments is overlay strategies that use derivatives such as swaps, options or futures to enhance the returns on underlying portfolio exposures.
Victory management said that like other alternative strategies under its umbrella, Harvest's operations will be "centralized but not standardized," keeping its investment autonomy, an independent brand, and its proprietary trading platform, but benefiting from shared services such as sales and marketing.