Apologies for recycling this picture so soon but I thought it would fit in well with this post.Yesterday I drove to Phoenix for a meeting and Joellyn came with me so I missed who the interview was with but there was a segment with the manager of a long short mutual fund during the program The Call.
The fund in question has done very well but the interview was odd. Apparently the fund is all quant, and whatever the model spits out they execute. The fund has over 1300 holdings and there is "a lot of turnover."
The way the interview went I got the impression that the manager did not know if the fund was short financials right now (it was short earlier) and he did not know his position (long or short) in energy.
It is not my intention to be critical because the results have been very good, I think it was up 9% in the second quarter, but whatever the best way to describe this fund it does not include the word simple.
Everything about the fund sounded very complex. As a matter of philosophy I think simple is better because it is easier to quantify the risk. The quant model that the fund uses, based on the interview, is a secret sauce. If something ever goes wrong (maybe this has happened with this fund in the past?) with the model or if there is some particular environment where it won't work there would be no way to understand why or mitigate in the future.
Compare that notion with one of the Canadian income trusts. The businesses are not simple, they are debt intensive and often very transaction oriented. In that light it is pretty easy to realize that anything the mucks up the capital markets or more narrowly the fixed income market stands to be a problem. You can see something like that coming much easier than a hiccup in quantitative that you can't look at.
Speaking of complicated, I am working on an article for TSCM about a frontier ETF from PowerShares that will trade under ticker PMNA. Without front running my own article this fund is far from simple.
I like the idea that the biggest variable of a holding is whether I am right or wrong not something from out of left field that not even the fund issuers could have envisioned. As I describe being right or wrong I am outlining the belief that where funds are concerned if the parts under the hood are static (as static as an index can be) then it becomes much easier blend different holdings together to get the desired effects--things like volatility, style, average market cap, sector weights and so on.
5 comments:
It's TFSMX. I'm an investor in the fund and I've also chatted online quite a bit with one of the other managers of the fund. My impression is that their model is likely very similar to most other quant hedge fund and 130/30 models. They suffered in August 2007 when the quant meltdown occurred which indicates they had similar positions. But they've much more than rebounded since then.
It might be a good idea to check how the TFS Market Neutral Fund has performed relative to its peers since August '07.
TFSMX is a WSJ Category King, Morningstar 5-Star fund, and a Lipper Leader.
Also notable, its portfolio managers are required to invest a substantial amount of their personal liquid net-worth in the fund.
And no loads or 12b-1 fees.
More info here: http://tinyurl.com/6lq8kh
I'm not convinced that staying simple will accomplish the returns that TFSMX has realized in such varied market conditions.
TFSMX is my largest single holding. I've only been an investor for a short time, but seeing the volatility and big down side of the current market makes me favor the fund with the best track record for holding steady against shifting currents.
Simplicity in ETFs is good. But in Long/Short small cap funds, the alpha is in the details. It takes a lot of data mining to distinguish winners from losers, without necessarily depending on sector performance.
Did PMNA begin trading on July 9? Is a drop in price normal, like with most IPO's? (Apologies for dumb questions!)
that it started trading today wouldn't mean anything for an ETF. Given the huge drop in the US market, I would not expect too many markets to be immune.
if the underlying index goes down then the fund will go down.
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