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Today, the WSJ published its monthly update on "Mutual Fund Investing". Several articles might be useful for your purposes.
For the more sophisticated MFO participant, you might like to explore a mutual fund that attempts to replicate a Hedge fund using past data to approximate hedge fund strategies. I do not subscribe to such a strategy because of several timing and modeling flaws, but you might find this alternate investment approach more attractive than I do. Here is the Link:
For the more novice investor, you might find the article that is targeted to address volatility and comfort level in a "crazy market" informative. Here is the Link:
Those looking for actual hedge funds can find some "feeder funds" on the pink sheets, including Third Point Offshore (TPNTF.PK) and Brevan Howard Macro (BHMDF.PK), but those are traded funds and are EXTREMELY (!!!) thinly traded "foreign ordinaries" (they trade officially on the London market.) Additionally, Greenlight RE (GLRE on the nasdaq) is a reinsurance company that invests with David Einhorn's hedge fund, Greenlight Capital. So, it's a roundabout way to invest with Einhorn. A couple of other hedge funds looking for stable capital are also going the reinsurance route this year - Third Point and (I believe) SAC Capital. Bill Ackman will also be listing a fund, although it's yet to be seen where it will be listed.
In terms of alternative funds, one of the best long-short funds is Marketfield (MFLDX) and in terms of alternative strategies, Natixis offers a few fine offerings. I like Rydex's Long-Short Commodity Fund a bit as a supporting player, but otherwise am not terribly fond of the Rydex funds. Timing and modeling are issues not unique to alternative funds, as well.
Thank you for your information packed reply to my WSJ article reference on Hedge Fund-lite mutual fund alternatives. You certainly have studied mutual fund options in this arena. I’m sure many MFO participants will benefit from your insights.
I no longer invest in mutual fund Hedge Fund strategy simulators; their strategies are too complex and often too convoluted to satisfy my conservative mindset. I now prefer simple, transparent approaches that are easily understood. That was not the case a decade ago.
In the past, I seriously considered and actually purchased a fund that featured long and short position tactics. The fund that I owned for over five years was a Barr Rosenberg originated Laudus market neutral fund. Performance results were mixed; overall rewards disappointed; the approach was anchored in exotic analytical models that Rosenberg’s team developed to more automate the decision process. Timing for a fund employing a market neutral philosophy is a daunting task that not many have successfully conquered.
You may recall that Rosenberg was a mathematical wiz-kid who Peter Bernstein highlighted in his groundbreaking book “Capital Ideas”. Rosenberg integrated the concepts of Markowitz, Tobin, and Sharpe into realistic models for daily investment guidelines. In the 1970s, Rosenberg was a kingpin in risk management, both from an educational perspective and as an active money manager. BARRA is his invention and bears his name. He enjoyed great success, both professionally and personally.
After several iterations his surviving investment operation (AXA Rosenberg Group LLC) firm ran into a reporting transparency issue with Charles Schwab and suffered a setback in distribution and, especially, in public trust. That occurred a few years past with the Laudus Rosenberg Global Long/Short Equity (RMSIX) fund. The issue was some coding error that was not properly reported. I believe Barr Rosenberg is not formally engaged with the firms that he founded, and is essentially retired.
From a September 22 release titled “Axa’s Barr Rosenberg to Pay $2.5 Million SEC Fine, Is Banned From Industry” from the Bloomberg business news agency: “Axa Rosenberg Group LLC’s co- founder Barr M. Rosenberg agreed to pay $2.5 million to settle claims by the U.S. Securities and Exchange Commission, which accused him of securities fraud for concealing a coding error in his firm’s investment model.” He can easily afford the fine, but the ban certainly erodes and diminishes his stature as a financial founding father. Too bad.
I had abandoned the market neutral hedging concept a few years earlier. Timing both buys, sells, and shorts is just too challenging a chore. It just adds too many dimensions to the decision process, even when directed by a sophisticated model and coupled to a fast machine with ample computing power. I have never been impressed with the historical performance record delivered by the various market neutral approaches.
Once again, thank you for your well crafted and informative reply.
Thank you for the response and a very interesting discussion of the Laudus fund.
I'm seeing new generations of alternative strategies appear for retail investors - in terms of managed futures products, there was the Rydex Managed Futures fund (not actively managed, positions changed only once a month), then the AQR Managed Futures fund (actively managed), now you have funds that allocate to hedge funds/commodity trading advisors (Mutual Hedge Frontier Legends, Grant Park Managed Futures).
Now, new generations do not mean that they're any good, but they offer the retail investor a product with much more flexibility and greater potential (emphasis on potential) to keep up with the market. Additionally, in terms of some "all-weather" strategies like managed futures, consistent (minor) returns. Arbitrage funds are another.
In terms of long/short funds or "market neutral" funds, I suppose it comes down to management, timing and many other issues. One (well, I) can also lean towards issues with funds going long/short on various fundamental metrics in a market that's less and less about fundamentals. The structure of a mutual fund also makes me wonder if a lot of these "hedge fund" like strategies are also difficult to consistently pull off to any great degree without the ability to trade heavily in the manner of many hedge funds (most of whom are also getting paid 2 and 20).
Marketfield (MFLDX) is one long-short fund that's done well given that it doesn't take the short element of the strategy quite as seriously and has demonstrated use of varied levels of shorting to dial up/down risk, whereas many funds in the category appear to desire (or be required) to have a consistently higher level of short positions. Again, timing, but it's done well so far and demonstrated a pretty strong ability to make macro bets and time risk exposure.
In terms of an actual hedge fund, Greenlight RE (GLRE) is a reinsurance company whose float is invested with David Einhorn's hedge fund, Greenlight Capital. It's a roundabout way of investing in a hedge fund, but more liquid than some of the other options. More managers are looking into this structure to try for stable money. Not a hedge fund, but another remarkably successful company with this structure is Fairfax Financial (FRFHF.PK), whose investments are run by successful value investor Prem Watsa (who bet against subprime in 2008, resulting in a positive return for Fairfax.)
I don't think one should have a massive portion of one's portfolio in alternative strategies and there are going to be funds that are gimmicks (many of which will likely get weeded out at some point, as some weirder ETFs have that either don't get interest or instances where people simply lose interest after the initial hype) or just plain mediocre, but I think there is a place for some of the better funds out there in one's portfolio to offer more loosely correlated returns and provide somewhat of a balance.
Comments
In terms of alternative funds, one of the best long-short funds is Marketfield (MFLDX) and in terms of alternative strategies, Natixis offers a few fine offerings. I like Rydex's Long-Short Commodity Fund a bit as a supporting player, but otherwise am not terribly fond of the Rydex funds. Timing and modeling are issues not unique to alternative funds, as well.
Hi Scott,
Thank you for your information packed reply to my WSJ article reference on Hedge Fund-lite mutual fund alternatives. You certainly have studied mutual fund options in this arena. I’m sure many MFO participants will benefit from your insights.
I no longer invest in mutual fund Hedge Fund strategy simulators; their strategies are too complex and often too convoluted to satisfy my conservative mindset. I now prefer simple, transparent approaches that are easily understood. That was not the case a decade ago.
In the past, I seriously considered and actually purchased a fund that featured long and short position tactics. The fund that I owned for over five years was a Barr Rosenberg originated Laudus market neutral fund. Performance results were mixed; overall rewards disappointed; the approach was anchored in exotic analytical models that Rosenberg’s team developed to more automate the decision process. Timing for a fund employing a market neutral philosophy is a daunting task that not many have successfully conquered.
You may recall that Rosenberg was a mathematical wiz-kid who Peter Bernstein highlighted in his groundbreaking book “Capital Ideas”. Rosenberg integrated the concepts of Markowitz, Tobin, and Sharpe into realistic models for daily investment guidelines. In the 1970s, Rosenberg was a kingpin in risk management, both from an educational perspective and as an active money manager. BARRA is his invention and bears his name. He enjoyed great success, both professionally and personally.
After several iterations his surviving investment operation (AXA Rosenberg Group LLC) firm ran into a reporting transparency issue with Charles Schwab and suffered a setback in distribution and, especially, in public trust. That occurred a few years past with the Laudus Rosenberg Global Long/Short Equity (RMSIX) fund. The issue was some coding error that was not properly reported. I believe Barr Rosenberg is not formally engaged with the firms that he founded, and is essentially retired.
From a September 22 release titled “Axa’s Barr Rosenberg to Pay $2.5 Million SEC Fine, Is Banned From Industry” from the Bloomberg business news agency: “Axa Rosenberg Group LLC’s co- founder Barr M. Rosenberg agreed to pay $2.5 million to settle claims by the U.S. Securities and Exchange Commission, which accused him of securities fraud for concealing a coding error in his firm’s investment model.” He can easily afford the fine, but the ban certainly erodes and diminishes his stature as a financial founding father. Too bad.
I had abandoned the market neutral hedging concept a few years earlier. Timing both buys, sells, and shorts is just too challenging a chore. It just adds too many dimensions to the decision process, even when directed by a sophisticated model and coupled to a fast machine with ample computing power. I have never been impressed with the historical performance record delivered by the various market neutral approaches.
Once again, thank you for your well crafted and informative reply.
Best Wishes.
I'm seeing new generations of alternative strategies appear for retail investors - in terms of managed futures products, there was the Rydex Managed Futures fund (not actively managed, positions changed only once a month), then the AQR Managed Futures fund (actively managed), now you have funds that allocate to hedge funds/commodity trading advisors (Mutual Hedge Frontier Legends, Grant Park Managed Futures).
Now, new generations do not mean that they're any good, but they offer the retail investor a product with much more flexibility and greater potential (emphasis on potential) to keep up with the market. Additionally, in terms of some "all-weather" strategies like managed futures, consistent (minor) returns. Arbitrage funds are another.
In terms of long/short funds or "market neutral" funds, I suppose it comes down to management, timing and many other issues. One (well, I) can also lean towards issues with funds going long/short on various fundamental metrics in a market that's less and less about fundamentals. The structure of a mutual fund also makes me wonder if a lot of these "hedge fund" like strategies are also difficult to consistently pull off to any great degree without the ability to trade heavily in the manner of many hedge funds (most of whom are also getting paid 2 and 20).
Marketfield (MFLDX) is one long-short fund that's done well given that it doesn't take the short element of the strategy quite as seriously and has demonstrated use of varied levels of shorting to dial up/down risk, whereas many funds in the category appear to desire (or be required) to have a consistently higher level of short positions. Again, timing, but it's done well so far and demonstrated a pretty strong ability to make macro bets and time risk exposure.
In terms of an actual hedge fund, Greenlight RE (GLRE) is a reinsurance company whose float is invested with David Einhorn's hedge fund, Greenlight Capital. It's a roundabout way of investing in a hedge fund, but more liquid than some of the other options. More managers are looking into this structure to try for stable money. Not a hedge fund, but another remarkably successful company with this structure is Fairfax Financial (FRFHF.PK), whose investments are run by successful value investor Prem Watsa (who bet against subprime in 2008, resulting in a positive return for Fairfax.)
I don't think one should have a massive portion of one's portfolio in alternative strategies and there are going to be funds that are gimmicks (many of which will likely get weeded out at some point, as some weirder ETFs have that either don't get interest or instances where people simply lose interest after the initial hype) or just plain mediocre, but I think there is a place for some of the better funds out there in one's portfolio to offer more loosely correlated returns and provide somewhat of a balance.