Tuesday, November 21, 2006

Investment Decisions

I have made the three investment decisions I've been discussing recently:

1. I am investing $7000 in the Hussman Strategic Growth Fund in my Roth IRA.

2. After my discussion with one of the portfolio managers, and reading up on their funds and approach to investing, I have decided to make an initial investment of $5000 (the minimum) in the TFS Market Neutral Fund. Currently, this fund is the top performer in Morningstar's long-short category. The fund's track record is short but over this time it shows strong upward movement, but short-term movements tend to be against the market. This indicates the fund has a low beta and high alpha which are desirable for a market neutral fund. This chart shows the fund's performance relative to the S&P 500:

The fund was particularly strong during the mid-year market meltdown and has beaten the market for the last 12 months and year to date. Other factors that I like are that the managers invest in the fund and also manage hedge funds through the same firm and that they have a particularly interesting compensation structure on a new fund they have launched, which includes an incentive fee, but could result in them receiving no compensation for the year. This suggests they are very confident of beating the market of course. Finally, they focus on quantitative investment and trading strategies.

3. I will max out my 403(b) contributions to my TIAA-CREF account, starting on December 1st.

The reason behind these moves is I don't want to add money to my U.S. trading accounts until they breakeven. I also don't want to devote more money to short-term trading until I can prove I can make profits consistently.

The Hussman and TFS Funds essentially give you a hedge fund without high hedge fund fees, high minimum investments, high net worth requirements, or low liquidity. These and other such funds are well worth considering as an alternative to traditional long-only mutual funds. I already invest in two hedge fund vehicles in Australia - one a fund of funds, and one a closed end fund that is similar to these two funds.

The two new funds add to my existing core investments. These are intended to be investments that do not need adjustment over the stock or business cycle. Eventually, I'd like to have around 50% of net worth in investments of this type I think.


Anonymous said...

Thanks for the business to TFS! Hopefully, it will prove to be worth your while.

By the way, I read about your 403(b) account and wanted to remind you that long/short funds are relatively tax-inefficient. Hussman's recent distribution is a good example of this. Our distribution is coming at the end of December and will be relatively large, too. (I could provide an estimate of its amount if contacted via email.)

The takehome --> Investors may consider putting more tax-inefficient investments in their tax-deferred accounts....and investing their after-tax money in the more efficient investments. Might be worth discussing with a financial advisor who does holistic planning.

But, for what it is worth, I currently have personal after-tax investments in TFSMX.

Rich Gates

mOOm said...

Thanks for the comments! My 403(b) has to be with TIAA-CREF, Fidelity, or Scudder (I am using TIAA-CREF). I bought the Hussman Fund in my Roth IRA (only 2 years of contributions in there so far). All my other retirement money is an Australian retirement account (with Colonial First State). So I bought TFSMX as a taxable investment.

This is an important personal finance point. A lot of people think instinctively that a retirement account is for the long term and therefore they should put a long-term buy and hold investment in there, when actually it can make sense to put taxable bonds, short term trades, and funds with a lot of taxable distributions in US retirement accounts (in Australia retirement account earnings and contributions are taxed at 15%).

Anonymous said...

TFS changed its website yesterday. I believe it caused some of your links over to it to die. You may consider updating them.

Also, we did a nifty analysis trying to estimate the alpha, beta, and correlation for all domestic equity funds for 2006. Results are pretty neat. Since I have seen some of your posts on these metrics, perhaps the analysis would interest you. If so, please contact me (phone and email address for West Chester office on our website.)

Thanks! Rich Gates