The folks from the Nakoma Absolute Return Fund (NARFX) got back to me and I am interviewing them Friday morning.
Since I first heard about this fund in the comments of this blog it is only logical that I turn to readers for help formulating a list of questions.
I do not know if I will turn this in to TheStreet.com or not, it depends on how the interview goes. If it does go there (as opposed to on the blog) it will be free to access for those who care.
A short while ago TSCM started running all of my content on the free site, I was told they want to give me wider distribution. I hope that is right.
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26 comments:
i got questions, though i intend to stop by their office on the 16th when i am in Madison so feel free not to use any that do not fit your interview style.
1) is the supposedly large cash position an actual cash position? or is it Short Reserve as a result of selling short?
2) what is their allocation target as far as long/short goes? we hear a lot about the 130/30 funds. Do they fall in a similar category or a different allocation?
3) are they choosing their investments based on Fundamentals? or Technicals? if the latter, as i suspect, how do they chose their position size in those micro-caps so that their own position does not alter the technicals?
thanks.
TSCM vs RealMoney?
Sounds like a demotion to me Roger.
No wonder I haven't seen any of your postings as of late, I never look on TSCM only Realmoney.
except they are paying me a lot more to be on TSCM.
Is there an RSS feed for your articles on TSCM? I tried to look for it and couldn't find it.
If there is I don't know about it. I will ask if that is possible.
Demotion?? When was the last time you saw Anonymous | 12:28 PM posting on EITHER TSCM OR Real Money??
Sounds like sour grapes to me, Roger.
rofl
What makes them choose a stock? (P/E, P/B, hot sector, etc).
Are they value oriented, and when do they decide to sell?
Do they have a target sale price when they buy?
And why is Taser of all the companies in the world still their 2nd largest holding? (you know I had to ask :) )
given the timely reporting of MFs they may have sold months ago, lol, but i will ask!
I know one of their managers (Mark) was the head of a investing program at University of Wisconsin, but not anymore although he is still a prof. I would ask how the dynamics of position selection has changed now that Mark is persumably more involved in the process (i.e. is it slower from idea generation to implementation).
I reviewed the prospectus dated 09/14/07. It indicates that the Expenses can INCREASE an additional $3.28% as early as
12/16/07. Page 10 of the prospectus:
Annual Fund Operating Expenses(expenses that are deducted from the Fund’s assets)
Advisory fees 1.50%
Other expenses
Short sales expenses 0.46%
Remainder of other expenses 3.77%
Total other expenses 4.23%
Total annual fund operating expenses 5.73%
Less expense reimbursement(3)* 3.28%
Net annual fund operating expenses plus costs of leverage and short selling(4) (after expense reimbursement) 2.45%.
Footnote (3)*
(3)*The Adviser has contractually agreed to reduce its advisory fee and/or reimburse expenses of the Fund to ensure that Net Annual Fund Operating Expenses do not exceed 1.99% of the Fund’s average net assets, excluding interest, taxes, transaction costs (such as brokerage commissions and expenses relating to dividends on short sales) and extraordinary expenses. This agreement is in effect until December 15, 2007.
I'd like to have an alternate to the Hussman Strategic Growth fund which I own and will continue to own.
Nakoma is too new for me to jump in now but, It's on the candidate list for my traditional January rebalancing.
How would you (they) compare Nakoma to Hussman?
Here's a pretty good article about the fund: http://www.fundalarm.com/nakom01.htm
I would ask:
What types of quantitative indicators do you use to determine market direction and sector strength? Can they share a few examples?
What factors to they deem most important to assess "the extent of the mismatch between a stock’s fundamentals and investor expectations of the stock"?
Risk management/risk profile of portfolio: How do they assess this? Can they speak to max position sizes, stops, etc.? How do they quantifify position risk?
Do they have a long term expectation for measures like std deviation or sharpe ratio?
1.99 ER too much to buy a new fund. They have alot of proving to do.
Timing Model update - now at -3.0
0% long, 100% cash
That's the worst reading since the summer of 2006, except this time the sentiment models are a very long way from overly pessimistic levels.
Yes, trend indicators cannot predict market direction. And yes, trend indicators are only right about half the time - but this smells very much like a bear. As I said several weeks ago, when markets roll over without hitting extreme levels of optimism, it's usually a sign that the big mo is down.
thanks for sharing this tom
According to Morningstar, NARFX (Nakoma Absolute Return) is currently a mid-cap growth fund, mid-cap growth is the present hot sector, do the managers or their system tilt towards recent sector over performence? If they do, how do they achieve such low volatility doing so? The hot sector is almost always the most volatile.
By the way, there is a misconception that NARFX is a small cap fund, here at this blog. One of the commentators last week, mistook NARFX for PVFIX (Pinnacle Value) which is a micro-cap, hedging, convertible fund.
Here’s an recent New York Times article on hedge fund performance mentioning Nakoma Absolute Return. It’s titled, “Those Who Play The Ups and Downs.” The link is here:
http://tinyurl.com/2zfwmw
This past August there was a liquidity crises that slammed most long-short funds, but not Nakoma Absolute Return. Favorite longs went down and favorite shorts went up as desperate managers with leveraged/sunken derivatives tried to raise cash. Is there something in NARFX’s black box that helped them skirt this blow-up? Most hedging open-ended type funds have yet to recover from this. Does management avoid the type of investments typically found in other hedge funds? I assume Nakoma (and other OE Funds) didn’t have sub-prime derivatives, but how did they avoid this period when everything went backwards?
For a August-to-present chart of NARFX and three other popular open-ended hedge funds (Diamond Hill Long/Short-DIAMX, Schwab Hedged Equity-SWHIX, James Market Neutral-JAMNX) follow link, below:
http://tinyurl.com/3yor5t
In their annual report, they (Nakoma) mention a “ongoing dynamic asset allocation process.” Is this a macro call, does value play a role, is there some sort of academic system involved (a quantitative system)? The annual report mentions “sentiment indicators” in their asset allocation decisions as a contrary play. Do they have a source of sentiment data for sectors and sub-sectors? If so, where do they get such sector data, I’ve never seen such a source?
Do they have a trading desk? Do their analysts trade the stocks they analyze? Is there some special system from the University of Wisconsin that’s produced such a smooth ride, so far?
The Mutual Series of mutual funds (now owned by Franklin) has a long tradition of analysts trading the stocks they follow. This has resulted in lower drawdown and a smoother ride, for their shareholders.
Are they planning to extend their “expense limitation agreement between the Adviser and the Fund.” This currently caps their fees at 1.99%. This does not include shorting fees, of course.
Roger,
The big question I would have is really to have them get into some detail about how their fund (system/strategy) would perform in a prolonged bear market such as down 25 to 50%. Can an investor count on at least flat to slightly up in such an environment (I know absolute guarantees are NOT possible but 95%+ probability)
I presently own Hussman Strategic Growth, but I am always interested in other long-short/absolute return funds. Whatever one wants to say about Hussman's recent performance (1-2 years) the fact is the fund delivers the goods in down markets or big down days. He was up today on a 3% market drop.
I've noticed that ALOT of these so-called market neutral/absolute return funds fall just as much as the market during these big down days or corrections like the August drop, which means they don't really offer the protection against a bear market that someone is looking for when buying this type of fund.
Anyways, it would be good to get a clear explanation on how they would protect against DOWN ALOT. Do they always maintain at least 30 to 50% short exposure?
I'd like to know what the Max Drawdown was on the hedge fund the Nakoma managers ran from 2000 on?
The top long-short funds:
http://biz.yahoo.com/p/tops/lo.html
JS
I should note that I couldn't find a 10 year track record for these funds. That is the number that I'm interested in so that I can see their performance through a bear market like 2000-2002.
I guess that we could check and see how each of these funds performed today to get a small window into their possible bear market performance.
This article says that...
"Long/short funds returned 7.3 percent over the last 10 years—with only slightly higher risk than a 10-year Treasury note, which now yields less than 5 percent. You buy them just like any other mutual fund, which means you don't need a high net worth to invest." http://tinyurl.com/2vreuh
So then if NARFX charges 2-3% (2.2% being the average, and way too high for me) in expenses you might as well own treasuries. Another good question for the good folks at NARFX: How well will they beat that 7.3 performance?
Here is Diamond Hill's 10 year performance:
http://tinyurl.com/3yc3mg
Hussman at 1.1% in expenses is starting to sound pretty good right now BTW.
JS
Another long-short player appears to be Caldwell & Orkin Market Opportunity.
"Caldwell & Orkin's long-term performance illustrates the long-short strategy's strengths and weaknesses. From 1995 to 1999, the fund churned out annualized returns of 24%, with astonishingly low volatility. It also gained 28% during the 2000-02 bear market, when the S&P plunged 47%. But as the market rallied, the fund logged small losses in 2003, 2004 and 2005. It gained 7% in 2006, again trailing the S&P.
Orkin admits that the rising market over the past few years has made it difficult for short sellers. Large buyouts engineered by private equity groups have been particularly troublesome. Even the rumor of a takeover bid is enough to cause a spike in the shares of a potential target, which hurts short-sellers. "When a stock gets beaten up, often private equity will come in and grab the stuff we like to short," says Orkin.
Lately, the fund has been on a tear, thanks to shorts in the subprime mortgage sector. So far this year through March 23, Caldwell & Orkin has climbed 7.2%, 5.5 percentage points ahead of the S&P. Orkin is currently shorting 37% of the portfolio, with his biggest shorts in companies that supply building materials to home builders. The fund, which has a minimum investment of $25,000, charges 1.60% in annual fees."
http://tinyurl.com/3aawt5
JS
ICON Long-Short (IOLIX) is interesting. Looking at the chart, this fund appears to correlate somewhat closely to the S&P 500. And, as it tracks the index, it manages to add a lot more volatility! And all the while, it just equals the S&P 500.
Owners of this fund can switch over to a S&P 500 index, dramatically reduce their volatility, and drop their fund expenses.
Here’s the chart:
http://tinyurl.com/2a7sbv
Slide the left side of the bar at the bottom of the chart (labeled 200days), farther to the left, to see the entire chart. This will take you back 1,200 or more days.
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