Jim Herrell considers himself a nontraditional index investor.

The chief investment officer at Partnervest Financial Group says his contrarian investing strategies take a more proactive approach to exchange-traded funds.

"We view volatility as an asset class unto itself that's negatively correlated with equity indexes," said Herrell.

The Santa Barbara, Calif.-based Partnervest manages portfolios for advisors across the country. It's part of a growing number of asset managers acting as outsourcers to independent planning firms.

Demand for such specialists is growing rapidly, according to industry statistics, as other aspects of financial planning—such as estate, health care and tax issues—are becoming more complex.

Partnervest was founded nearly seven years ago by ex-executives of a large asset manager based in Scottsdale, Ariz., that focused on serving high net worth clients and institutions in the health care industry. Herrell is a former longtime hedge fund manager.

Efficiency In An Inefficient World

"We believe markets are efficient, but traditional asset-class investing is inefficient," he said. "We're investing with the goal of achieving high absolute returns independent of the market's direction."

Before joining Partnervest last July, Herrell was a manager at Santa Barbara Quantitative Strategies for about five years. He was also a partner at Strome Investment Management, a global macro-hedge fund.

Herrell, age 42, started using ETFs with his hedging strategies in 2003. "Not only are they more flexible and transparent than mutual funds," he said, "but many ETFs have listed options."

That's important since some of the most sophisticated hedging approaches utilized by Partnervest rely heavily on options.

"Structured targeted-return strategies that used to be the purview of hedge funds and big institutions have been democratized by the rise of ETFs," said Herrell. "Now, almost any investor can access strategies similar to those used by Harvard and Yale and other large institutions in an all-ETF format."

An approach that simply invests in long positions with ETFs is just too risky in his view. "One bad year's worth of volatility can destroy several years' worth of accumulated returns," said Herrell. "No matter how you slice and dice it, traditional asset class investing provides way too much risk for the amount of return it can provide."

Partnervest's managers say they don't try to predict market movements. "The only predictive element in our strategy is that volatility is a constant," said Herrell.  "And our portfolios are built to take advantage of that uncertainty."

The firm employs a mix of strategies using ETFs. The simplest tries to maximize alpha. For example, the firm uses the SPDR S&P 500 (NYSE: SPY). Herrell says the ETF is added into the mix with the expectation that its underlying index will show long-term volatility of at least 20% a year.

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