Sold All My Shares in Platinum Capital

The company announced the result of its strategic review: They will merge the listed investment company PMC.AX and their ETF PIXX.AX. The price jumped on the news to the $1.45-1.46 range. This leaves about a 5% potential gain to the current NAV of PMC.AX. But we have to wait probably till the end of the year for the plan to come fruition, and if PMC.AX continues to underperform as it has recently, the NAV can fall. So, I sold all my shares today.

It was one of my oldest investments. I first invested in 2001 but sold during the dot.com crash. I then reinvested in 2005 and have held varying amounts of shares since then. The internal rate of return has been 12.02%, which was enhanced by trading the shares. Total profit AUD 100,530.

Regal Partners Thesis

Regal Partners (RPL.AX) – the listed management company of Regal Funds – has increased rapidly in price recently:

I have doubled the size of my holding from 10k to 20k shares. I think both the Merricks acquisition and the private placement by the Pershing Square management company at a high valuation have been positives that have helped push the price higher. I am now back in profit on this investment. The IRR has hit 7.7%, which is pretty decent all things considered. The chart looks bullish for now, especially given the large volume associated with the green candles.

In other news, Defi Technologies (DEFI.NE) briefly hit double my initial entry point on Friday at CAD 1.88 before pulling back to close at 1.76. My average price is higher than CAD 0.94 due to subsequent additional purchases, including another 5,000 shares on Friday. I now have 70k shares.

Cambria Funds Launches a New Managed Futures ETF: How Will it Perform?

Cambria Funds have launched a new managed futures ETF – MFUT – managed by Chesapeake - Jerry Parker's (one of the turtle traders) firm. I compared the historic performance of the Chesapeake Diversified Plus managed futures program to the Winton Global Alpha Fund since 1996:

Clearly, Winton has outperformed Chesapeake and with substantially less volatility. The average return of Chesapeake has been 11.6% p.a., while Winton achieved 15.0%. Chesapeake's information ratio (Sharpe ratio with a zero percent hurdle) was only 0.44, while Winton's was 0.96.

It seems that Chesapeake's volatility decreased after about 2012. So let's focus on the period since then. Since the beginning of 2012 Chesapeake has outperformed Winton with an average annual return of 8.8% vs. 7.3%. However, Winton was still less volatile with an information ratio of 0.77 vs. Chesapeake's 0.52.

The full period, the correlation between the monthly returns of the two funds was only 0.44. Since 2012 it was 0.54. So, there it would seem there is a potential diversification case for investing in both funds. However the information ratio of an equal weight combination of the two funds is lower than that of Winton alone. This is true for both the full period and the post 2011 period. So, based on this, I won't be investing in MFUT.

Pershing Square Sells Stake in Management Company

Pershing Square has sold a 10% stake in its management company for USD 1.05 billion. Last year, Pershing Square Holdings, its listed hedge fund that makes up most of its assets under management (we have 5k shares in it), made around USD 400 million in management and performance fees. Even if we assume that most compensation of employees is through dividends and share appreciation rather than salaries, that makes the P/E of the management company around 25, which is very high for an asset management company, especially one depending on variable performance fees. Regal Partners - an Australian listed hedge fund manager that I am invested in (13k shares) - has a forward P/E of about 15. Rather, Pershing Square's high P/E is predicated on raising a new USD 25 billion listed fund in the US. At 2%, this would produce management fees of USD 500 million per year! The fees of the existing Pershing Square fund listed in London will be reduced by part of the management fees on the new fund, so the $500 million isn't purely accretive. Previously Ackman said that they planned to raise USD 10 billion for the new fund.

Platinum Capital Announces Strategic Review

Platinum Capital is a closed end international hedge fund listed on the ASX, which I have invested in for a very long time. In the past, I gained by trading when the fund traded above or below net asset value. But since the pandemic started it seems to have been in a permanent slump. Currently, the share price is 25 cents below the NAV. The underlying performance of the fund has also been relatively poor for a long time. Now, Platinum has announced a strategic review that could include converting to an open ended fund. The latter would allow redemption at NAV. I support this idea. I might even buy more of the fund in anticipation.

P.S. 11:35am

The stock has jumped 7 cents on the news, but there is still 17 cents to go to reach the NAV, so I bought 25k shares in the SMSF.

Regal Funds Adds Private Credit

After recently adding a resource royalties strategy, Regal Funds (RF1.AX) are now adding a private credit strategy. They also announced a placement and rights issue to help implement the new strategy. The fund started primarily as a listed hedge fund with some private equity. But it is increasingly becoming a diversified alternatives fund. I suppose all these new strategies are supposed to reduce the correlation of the fund to the stockmarket. The fund has had a beta of 1. However, this looks like it will come at the expense of performance. You can't do 20% a year in strategies like private credit. Well, I guess you can lever up...

In any case, performance wasn't good in November, especially relative to the stockmarket which rose strongly. I sold 10,000 shares this week to increase my holding of URFPA. The rights offering is at AUD 3.01 a share (current NAV) with a maximum of AUD 30k per holder. I decided not to bother as I can't buy more than 2,000 shares without selling something else.

Regal Investment Fund Implements Resource Royalties Strategy

 

Regal Investment Fund (RF1.AX) is continuing to diversify their portfolio. Recently, they added a water strategy through Kilter Rural. Now they are adding a resource royalties strategy through the Gresham Resource Royalties Fund. While the water strategy is only 2% of the fund, the resource royalties strategy will be 17% of the fund initially. I am categorizing both of these in the real assets class. From the announcement:

"A resource royalty is a right to receive payment usuallyreflecting the value of a percentage of revenue derived from the production from a mining, oil and gas or renewable project. A commodity stream is an agreement conferring a right to purchase all or a portion of the production produced from a mining, oil and gas or renewable project at a pre-set price. Royalties and commodity streams are often used interchangeably. Royalties and commodity streams are typically acquired for an upfront payment. They can provide investors with the upside potential of increased commodity prices, increased production and extended mineral reserves (and sometimes new discoveries) with no or limited exposure to variable operating costs and future capital calls to fund exploration or other capital costs."

Cadence Opportunities IPO

Another "corporate action" to consider. Cadence Opportunities Fund attempted an IPO about three years ago, which failed. I invested in the fund at a second fund-raising. Now it is again attempting an IPO and attempting to triple funds under management in the process. I was thinking to buy more shares in the IPO and even moved money from one account to another to do so, but then had second thoughts. Don't get me wrong, this is so far a great investment. I have a 50% internal rate of return on my investment. But after reading the independent report I became concerned that the price might trade below the IPO price and so it would be better to wait to buy shares on market. On the other hand, if the fund keeps performing so strongly, the increase in the NAV might outweigh an illiquidity discount... But given we have 3% or so of net worth in the fund already, I think I will give it a pass.

Update on PSTH

Bill Ackman posted a link to this presentation on Twitter. I have 3,000 shares or a 2% of net worth position. We also have 5,000 shares of PSH.L, Ackman's hedge fund that will be buying $1.5 billion of UMG shares by buying PSTH shares. Vivendi shareholders vote on Tuesday to approve the listing of UMG (hopefully) and presentations take place on Wednesday morning US time.

Investments Review: Part 4, Hedge Funds

Regal Funds (RF1.AX). Share of net worth: 5.63%. IRR: 45.7%. This is a multi-strategy hedge fund listed on the ASX that has performed very well since the COVID crash:

It has a beta of one to the stock market but has added a lot of alpha. The downside is that it has a trust structure and, therefore, pays out all profits in the form that they were earned in. So, it is not very tax-effective. We have now moved our holding to our SMSF. The stated focus is on Australian stocks, but they hold a lot of foreign stocks too.

Tribeca Global Natural Resources (TGF.AX). Share of net worth: 5.57%. IRR: 19.2%. This a global resource sector focused hedge fund listed on the ASX. From launch the price collapsed from $2.50 to under $1. They also lost a lot of money on a large loan to a US based coal mining company. They now have revised the investment guidelines to prevent a recurrence. The NAV is now above the IPO price and the stock price is almost there. We have gained a lot by buying when the price was depressed as well as in after-tax terms by selling when the price was depressed to take a tax loss.

Pershing Square Holdings (PSH.L). Share of net worth: 5.33%. IRR: 39.8%. This fund is listed on the London stock exchange but managed by Bill Ackman, a famous US hedge fund manager. The fund is very focused. They invest in around 10 large cap mostly US stocks at any one time. It is mostly a long fund. But they gained during the COVID crash by putting on a credit -ased hedge. Almost perfect market timing. The history of Pershing Square Holdings has been a bit erratic but since we invested it has been very good. The fund is still trading a lot below net asset value. Pershing Square Tontine Holdings has been in the news recently following its deal to buy 10% of Universal Music. I'm still not clear what will be the pay-off for PSH.L holders from this deal. Both PSTH and PSH fell on the news.

Cadence Capital (CDM.AX). Share of net worth: 3.80%. IRR: 10.2%. This is a long-biased long-short fund that mostly invests in Australian stocks. I invested in this fund when it had been performing well. Then, soon enough, it started to perform badly. Since the COVID crash it has done well. They also invested in a private investment in DeepGreen Minerals, which will be taken public by a SPAC for a huge gain on Cadence's investment price. I am thinking to trim my exposure to this fund once the price has built in the value of the DeepGreen Investment. There is no reason to hold both this and the Cadence Opportunities Fund, and this is also the worst performing of the hedge funds that I have held for at least a few years.

Cadence Opportunities Fund. Share of net worth: 2.76%. IRR: 41.6%. This fund was launched recently by the managers of Cadence Capital. This fund has performed extremely well. It is a long-biased long-short fund that trades more actively than CDM.AX. It was supposed to be listed on the ASX but the IPO failed and it became a private company. At the time I didn't invest. That was a bad decision. When a second opportunity to invest came up, I took it. Our IRR so far shows that was a good move.

Platinum Capital (PMC.AX). Share of net worth: 2.67%. IRR: 13.0%. I first invested in Platinum Capital back in 2001. Over time, we also held various unlisted versions of the fund. I have gained by trading the fund depending on whether the share price was above or below NAV. The fund's best performance was during the dot.com crash when I first invested in it. Most of the time since then it has underperformed the market but has also had lower volatility. In the last year, value investing has come back into favor and the fund has again been outperforming the market.

APSEC. Share of net worth: 2.07%. IRR: -7.5%. This is an unlisted Australian stocks focused hedge fund. They did very well in the COVID crash:

So, I invested in them, and then they haven't done so well since then.

Contango Income Generator (CIE.AX). Share of net worth: 1.41%. IRR: -11.9%. This is a very new investment, so the IRR likely is pretty meaningless. This listed fund recently changed strategy to a global equity long short portfolio managed by WCM Investment Management. This is supposed to be their track record:

This was the result of an activist campaign by Wilson Asset Management. It is supposed to be hedged into the Australian Dollar.

In summary, a bit more than half of our hedge fund exposure is to the Australian Dollar but there is definitely quite a lot more international than Australian equity exposure.

Third Point and AlphaSimplex

I don't write much on the blog about investments I evaluated but rejected. There are quite a lot of these, of course. Recently, I evaluated and rejected Third Point and AlphaSimplex. Third Point is  a well-known hedge fund managed by Daniel Loeb. Retail investors can invest in it through TPOU.L a closed-end fund on the London stock exchange. AlphaSimplex is a managed futures manager based in Boston that developed out of MIT. U.S. retail investors can invest with them through mutual funds issued by Natixis Funds. ASFYX has a USD 100k minimum and a lower expense ratio than AMFAX which has a low minimum investment. Non-U.S. investors can access them via Luxembourg based funds. There are institutional (USD 100k minimum and lower management fee) and retail classes (USD 1k minimum and higher management fee) and the funds are available in various currencies. Even the Australian Dollar! Kathryn Kaminski, their chief research strategist, was just on Meb Faber's podcast.

So, is this fund any good? And what about Third Point? Both these investments were interesting enough for me to do some proper analysis on them. These are some results using annual returns:

The period of analysis is the length of the track record provided by AlphaSimplex. All returns are in U.S. Dollars. None of this analysis deducts the risk-free-rate from returns. My returns in U.S. Dollars are not very good over the last ten years. In Australian Dollar terms they are much better.

So, it turns out that using annual data AlphaSimplex has a beta of 0.34 to the MSCI World Index and no alpha. Its correlation with the market is 0.4. Its average return was just 3.4% with a Sharpe ratio of 0.3. The Winton Global Alpha Fund has had similarly poor returns but actually has a negative beta and positive alpha. Before the 2020 debacle, Winton was a lot better than AlphaSimplex. I'm definitely not sold on AlphaSimplex.

Third Point is more attractive. However, it acts more or less like a good quality long-only fund. It's correlation with the MSCI is 0.92. It has an alpha of 1.4%. I added Pershing Square Holdings as a comparison. It has a much lower correlation to the market though it has a beta of 1.04. With an alpha of 4.3% it adds much more uncorrelated return. So, I haven't found Third Point convincing enough to add to the portfolio.

Hedge Funds Outperform Again in February

HEDGE FUNDS SURGE IN FEBRUARY AS INTEREST RATES RISE

HFRI Equity Hedge leads broad-based gains as retail trading trend expands;
Macro, CTA strategies advance on rates, commodities;
Crypto, Activist, Technology, Energy sub-strategies also lead

CHICAGO, (March 5, 2021) – Hedge funds surged in February to extend January gains as interest rates, commodity prices, and expectations for the reemergence of inflation all increased. The HFRI Fund Weighted Composite Index® (FWC) gained +4.1 percent in February, while the investable HFRI 500 Fund Weighted Composite Index advanced +3.2 percent, according to data released today by HFR®, the established global leader in the indexation, analysis and research of the global hedge fund industry.

Consistent with the previous month, the HFRI FWC experienced a wide dispersion in constituent performance, as the top decile of the HFRI gained +16.3 percent, while the bottom decile declined -3.1 percent for the month. As reported previously by HFR, total hedge fund capital jumped to $3.6 trillion to begin 2021, a 4Q20 increase of $290 billion, representing the largest quarterly asset growth in industry history. Estimated 4Q20 net asset inflows totaled $3.0 billion, bringing total inflows for the second half of 2020 to an estimated $16.0 billion.

Equity Hedge strategies, which invest long and short across specialized sub-strategies, led February performance as the influence of retail investors increased trading volumes and investors expanded their focus to a wider range of individual equities. The HFRI Equity Hedge (Total) Index surged +4.8 percent for the month, with strong contributions from a wide dispersion of sub-strategy performance led by the high-beta, long-biased Energy, Fundamental Value, and Technology exposures. Following strong January gains, the HFRI EH: Energy/Basic Materials Index surged +9.7 percent in February, while the HFRI EH: Fundamental Value Index spiked +6.4 percent and the HFRI EH: Sector-Technology Index added +4.4 percent.

Event-Driven strategies, which often focus on out of favor, deep value equity strategies and situations, accelerated January gains into February, with the investable HFRI 500 Event-Driven Index surging +2.8 percent for the month, while the HFRI Event-Driven (Total) Index gained +3.6 percent. ED sub-strategy gains were led by Activist, Special Situations, and Credit Arbitrage exposures, strategies which categorically trade in deep value equity situations, including companies which are possible targets for restructuring, acquisitions or investor-driven strategy shifts. The HFRI ED: Activist Index surged +8.3 percent in February, while the HFRI ED: Special Situations Index advanced +4.1 percent, and the HFRI ED: Credit Arbitrage Index added +2.7 percent.

Uncorrelated Macro strategies also posted a strong gain in February, driven by trend-following CTAs and fundamental Commodity-focused strategies. The HFRI Macro (Total) Index jumped +3.6 percent, while the investable HFRI 500 Macro Index spiked +3.7 percent. Driven by strong trends in interest rates, Macro sub-strategy performance was led by the HFRI Macro: Systematic Diversified/CTA Index, which gained +4.4 percent for the month, and the HFRI Macro: Commodity Index, which added +4.1 percent.

The fixed income-based, interest rate-sensitive HFRI Relative Value (Total) Index gained +2.3 percent in February, while the HFRI 500 Relative Value Index advanced +1.5 percent for the month, led by the investable HFRI 500 RV: Volatility Index, which jumped +3.0 percent, and the HFRI 500 RV: Fixed Income-Convertible Arbitrage Index, which advanced +2.4 percent. Extending the January surge, Blockchain and Cryptocurrency exposures continued to deliver strong performance as cryptocurrencies reached record highs and as hedge funds increasingly incorporated related exposures into new and existing fund strategies. The HFR Blockchain Composite Index and HFR Cryptocurrency Index each surged nearly +30.0 percent in February.

Risk Premia and Liquid Alternatives also gained in February, led by multi-asset and commodity exposures. The HFR Bank Systematic Risk Premia Multi-Asset Index advanced +7.9 percent for the month, while the HFR BSRP Commodity Index gained +3.3 percent. The HFRI-I Liquid Alternative UCITS Index advanced +1.05 percent in February, driven by a +1.8 percent gain in the HFRI-I UCITS Event Driven Index.

"Recent hedge fund gains accelerated through February, marking the strongest 4-month period in over 20 years as the drivers of performance widened to include not only Event Driven and Equity Hedge, but also captured strong positive contributions from trend-following Macro and interest rate-sensitive Relative Value Arbitrage strategies", stated Kenneth J. Heinz, President of HFR. "New stimulus measures, increasing vaccinations, and uncertainty with regards to immigration and energy policy have shifted macroeconomic and geopolitical volatility to include not only the single stock or asset trends from concentrated, increased retail trading but also cryptocurrency trading, energy exposure and interest rate/inflation sensitivity. Institutional investors are likely to continue expanding allocations to leading hedge fund managers as a mechanism to gain specialized exposure to these and other powerful trends through mid-2021".

Tweaking the Target Portfolio

I've decided to slightly tweak the target portfolio weights to reflect a larger allocation to hedge funds. The top level allocation is 59% to equity and 41% to everything else. Then there is 10% to private equity (split between venture and buyout) and 49% to public equity. Within that 25% to long-only and 24% to hedge funds (was 21.5%) (also split 50/50 to Australian focused and foreign focused funds). And within the long-only 13% to Australia and 12% to the rest of the world. Within Australian 9% to large cap and 4% to small cap and within foreign 5% to the US and 7% to other countries. Within the "everything else category", 10% to gold, 10% to bonds, 10% to real estate, 5% to art, 5% to futures, and 1% to cash and everything else. So:

9% Australian large cap

4% Australian small cap

5% US stocks

7% ROW stocks

12% Australian focused hedge funds

12% Foreign focused hedge funds

5% Venture capital

5% Buyout PE

10% Gold

10% Real estate etc.

10% Bonds

5% Art

5% Futures

1% Cash etc.

Overall the whole portfolio is levered by about 20% (assets are 120% of equity). This 20% is roughly the value of our house, which isn't included in the above. We also try to maintain a 50:50 allocation to Australian Dollar exposure vs. foreign currency exposure. My job is mainly to choose funds and a couple of stocks and do a little trading in part of the futures allocation.

We are still overweight hedge funds after this change.

Hedge Funds Gained 0.92% in January

 HEDGE FUNDS GAIN IN JANUARY, NAVIGATING VOLATILITY

HFRI Event Driven, RVA & Crypto lead strategy performance;
Deep value Special Situations, Merger Arbitrage, Credit lead sub-strategies

CHICAGO, (February 5, 2021) – Hedge funds advanced in January to begin 2021, actively trading through a turbulent month dominated by a volatile surge in trading from retail investors concentrated in a handful of deep value equities with significant short interest. The HFRI Fund Weighted Composite Index® (FWC) gained +0.9 percent in January, while the investable HFRI 500 Fund Weighted Composite Index advanced +0.35 percent, according to data released today by HFR®, the established global leader in the indexation, analysis and research of the global hedge fund industry.

Reflecting the powerful trading trends, the HFRI FWC experienced a wide dispersion in constituent performance, as the top decile of the HFRI gained +11.6 percent, while the bottom decile declined -7.8 percent for the month. As reported previously by HFR, total hedge fund capital jumped to $3.6 trillion to begin 2021, a 4Q20 increase of $290 billion, representing the largest asset growth in industry history. Estimated 4Q20 net asset inflows totaled $3.0 billion, bringing total inflows for the second half of 2020 to $16.0 billion.

Event-Driven strategies, which often focus on out of favor, deep value equity strategies and situations, led strategy performance in January, with the investable HFRI 500 Event-Driven Index surging +3.0 percent for the month, while the HFRI Event-Driven (Total) Index gained +2.8 percent. ED sub-strategy gains were led by Merger Arbitrage, Special Situations, and Distressed exposures, strategies which categorically trade in deep value equity situations, including companies which are possible targets for restructuring, acquisitions or investor-driven strategy shifts. Following strong performance in 4Q20, the HFRI ED: Merger Arbitrage Index surged +4.0 percent in January, the HFRI ED: Special Situations Index advanced +3.8 percent, and the HFRI ED: Distressed Index added +2.6 percent. The investable HFRI 500 ED: Special Situations Index jumped +6.2 percent for the month, and the HFRI 500 ED: Merger Arbitrage Index advanced +5.1 percent.

The fixed income-based HFRI Relative Value (Total) Index gained +1.3 percent in January, while the HFRI 500 Relative Value Index advanced +1.2 percent for the month, led by the investable HFRI 500 RV: Fixed Income-Convertible Arbitrage Index, which jumped +3.5 percent, and the HFRI RV: Yield Alternatives Index, which added +4.0 percent.

Following the 2020 surge, Blockchain and Cryptocurrency exposures continued to deliver strong performance as cryptocurrencies hit record highs and as hedge funds increasingly incorporated related exposures into new and existing fund strategies. The HFR Blockchain Composite Index and HFR Cryptocurrency Index each surged over +48.0 percent in January.

Through intense stock volatility, the HFRI Equity Hedge (Total) Index advanced +0.8 percent for the month. Equity Hedge funds experienced a wide dispersion of sub-strategy performance led by the high beta, long-biased Energy and Fundamental Growth exposures. Following strong 4Q20 gains, the HFRI EH: Energy/Basic Materials Index surged +4.8 percent in January, while the HFRI EH: Fundamental Growth Index added +2.3 percent. Partially paring these gains, the HFRI EH: Sector-Technology Index declined -1.1 percent, and the HFRI EH: Multi-Strategy Index fell -0.8 percent for the month.

Risk Premia, Risk Parity and Liquid Alternatives produced mixed performance in January, led by equity and commodity exposures. The HFR Bank Systematic Risk Premia Equity Index advanced +2.2 percent for the month, while the HFR BSRP Commodity Index gained +1.6 percent. The HFR Risk Parity Vol 12 Institutional Index fell -0.2 percent in January, while the HFRI-I Liquid Alternative UCITS Index posted a narrow loss of -0.14 percent for the month, driven by the -0.3 percent decline in the HFRI-I UCITS Macro Index.

Uncorrelated Macro strategies posted a narrow gain in January, with the HFRI Macro (Total) Index advancing +0.2 percent, while the HFRI 500 Macro Index added +0.1 percent. Macro sub-strategy performance was led by the HFRI Macro: Discretionary Thematic Index, which gained +1.8 percent for the month, and the HFRI Macro: Multi-Strategy Index, which added +1.1 percent.

"Hedge funds effectively navigated the idiosyncratic stock trading volatility which focused on deep value equities with high short interest, with this trend driving gains across Event Driven strategies which categorically focus on inexpensive, out of favor equities that are experiencing fundamental, structural transition in the underlying businesses. While certain sub-strategies declined in January, as is evidenced by the wide dispersion in performance, as a direct result of the size, breadth and diverse nature of hedge fund strategies, overall industry performance was positive for the month," stated Kenneth J. Heinz, President of HFR. "While significant financial market attention has been focused on a handful of funds and small number of equities impacted by these recent trading trends, the overall hedge fund industry is comprised of over 9,100 funds managing nearly $3.6 trillion across a highly diverse range of strategies, which include significant capital exposure to out of favor, deep value equities. With an emphasis also on opportunistic positioning and sustained capital appreciation achieved through specialized long-short portfolio management, leading institutions are likely to continue expanding allocations to hedge funds as a tool for achieving their long-term portfolio objectives."

Hedge Funds Beat the S&P 500 in December

It's rare to see hedge funds beating the major stock indices to the upside these days, but that's what happened in December when the HFRI returned 4.47% and the S&P 500 3.84%. The MSCI World Index gained 4.68%. As a result our target portfolio actually returned 6.13% in US Dollar terms, though we still beat it, gaining 7.21%. In Australian Dollar terms it gained 1.26% rather than just breaking even as I reported a few days ago.

Two New Investments

The second Aura Venture Fund finally closed this month and the first capital call was made for 25% of the investment. One of the things I like about these venture funds is that they gradually trickle money into the market. The others are that they have negative tax (a 10% tax offset on investments and no tax on gains or income) and the first fund has so far performed well. As I am committed to invest AUD 250k, this first payment was AUD 62.5k.

The second investment is the Cadence Opportunities Fund, which is an active trading equity hedge fund structured as a private company. When this fund was first floated and failed to IPO (instead it became an unlisted hedge fund), the main Cadence Fund (CAM.AX) was performing badly and so I decided not to invest. That was a mistake. The fund has gained more than 100% since launching. Now they have a rights issue and the opportunity for outside investors to obtain shares that aren't subscribed to by existing investors - the "shortfall". I put in a bid for AUD 100k in Moominmama's name.

New Investment: Atlantic Pacific Australian Equity Fund

I made an investment in this unlisted hedge fund that is open to retail investors. Our long-term goal is to invest 10.5% of assets in Australia focused hedge funds. At the end of April we only had about 4.7% of financial assets (i.e. not including our house) invested in this category. This investment brings this up to about 7%.

The fund is long-bias equity market hedge fund buys and short sells, Australian listed securities and derivatives. It has performed particularly well in the current crisis:

It didn't perform very well in the previous 5 years, though it has always been good at avoiding downside in the market and so is a potentially good diversifier.

Benchmarking

As we move further away from an equities oriented portfolio, I think that benchmarking against equity indices makes increasing less sense. We are also in a multi-year process of investing inherited cash, which means our portfolio is more cash and bonds heavy than it will be in the long run. As we near "financial independence" I am also becoming more risk-averse. This is the opposite of the usual textbook economics prediction that risk-aversion decreases with wealth. Part of it is that I feel like I should take less risk with the inherited money than with the money I saved myself. My goal is to pass on to my children at least as much as I inherited myself.

So, I am increasingly thinking that an index of hedge fund returns makes more sense as a benchmark. Hedge funds in general aim for lower volatility than equity indices. And hedge fund returns are after fees and so are a more realistic goal to aim at. This is why I have been researching hedge fund performance.

The returns of the typical hedge fund have declined over time and the typical hedge fund no longer produces alpha relative to the MSCI world stock index. Hedge fund returns are increasingly correlated with stock returns. Our own returns are converging towards those of hedge funds:

The graph shows rolling regression estimates of our alpha and beta relative to the HFRI fund weighted index. Our alpha is now around 0% and beta is 2. For a 1% change in hedge fund returns our returns typically change 2%. Mostly in the past we had a negative alpha to hedge fund returns. Comparing our actual returns (in USD terms) to those of the HFRI index, at times we have underperformed and at times outperformed the index:

The graph shows how many percent per year extra you would have earned by investing with me instead of in hte HFRI index starting in each month on the graph. So, if you invested with me in October 1996 you would have received about 2% per year less since then than investing in HFRI. But from November 2002 you would have been 2% per year better off by investing with me instead. By contrast, there have been few months in the last couple of decades where my subsequent cumulative return has been better than the MSCI World Index:

May and June 2003 was one such short period. I have outperformed the index since then. August 2015 and May 2017 were two other recent cases. But there are long periods where my subsequent performance was more than 3% p.a. worse than the index. On the other hand, perhaps the hedge fund index is too easy a benchmark to beat:

The Average Hedge Fund No Longer Produces Alpha

I regressed the excess (above risk free rate) monthly returns of the HFRI fund-weighted hedge fund index on the excess returns of the MSCI All Country World Index (gross returns):

Back at the turn of the century, the hedge fund index had alpha between 5 and 10%. But it collapsed going into the financial crisis and in the most recent 5 year period alpha is -0.17% p.a. Beta is 0.34. The r-squared between the MSCI and HFRI excess returns is 0.86, which is high. So, you might as well invest 34% of your money in global stocks and the rest in cash to replicate the index. Interestingly, a linear trend line rather than an exponential trend line fits the index:

So, it doesn't make sense to invest in hedge funds recently unless you can select an above average fund.

Rescued the Bad Trade

I stayed up and closed at 7119.75 the bad trade where I went long at NQ = 7145. So in the end I only lost USD 500 on that trade and am still up more than USD 6k for the month. If I exactly followed the model, though, I would be up USD 13k! The model is now switching to long for Friday, but this trade is based on the adjustment I made for the 1987 crash (picture below from 1987) and doesn't have a lot of statistical support. So, this is a high risk trade and I think I will wait it out. Yeah, I'm not doing what the model says to do but at least I am not trading against it!

In other news, the Tribeca fund (TGF) starts trading on the ASX today . They only sold 63 million shares in the IPO out of a maximum of 120 million, which is a bit disappointing. Maybe, my thesis that it would trade above NAV will take a while to work out. My entry point into Pershing Square was really bad - lost around 4% already on it. I also did a trade yesterday to switch back AUD 20k from CFS Conservative Fund to CFS Geared Share Fund. ASX SPI futures are off 47 points but CME NQ futures bounced after the New York close and the model is switching to long, so hopefully my timing wasn't too bad.