The re-emergence of mergers-and-acquisitions activity has become a key driver in the performance of the Hatteras Alpha Hedged Strategies Fund Ticker:(ALPHX).
The $300 million fund is managed by a team at Hatteras Funds, a $1.8 billion firm.
Unlike most alternative-strategy registered mutual funds, this fund allocates assets directly to 18 underlying hedge fund managers across four broad categories.
The event-driven category, which is benefiting from increased M&A activity, has a 25% allocation in the fund, and that slice of the portfolio is up 12% so far this year.
“Our portfolio allocation is dependent on our market outlook and viewpoint,” said Hatteras president Bob Worthington, who oversees all investment functions at the firm.
The portfolio is constructed, he said, by “considering each underlying manager's risk-return profile in the context of current market conditions.”
With that in mind, the event-driven category is currently at the high end of its allocation range of between 5% and 25%.
The long-short equity category, which has an allocation range of 25% to 45%, currently makes up 25% of the fund.
The long-short allocation, which is down 5% so far this year, is being hampered by overall market volatility, Mr. Worthington said.
The relative-value category has a 25% weighting in the fund, about the middle of the 15% to 35% allocation range.
Relative value, which is up 12% this year, is made up of arbitrage-oriented strategies related to convertible securities and high yield bonds.
The market-neutral category, which is down 1.5% this year, has a 21% allocation, and has the flexibility to represent between 15% and 35% of the portfolio.
Mr. Worthington described the market-neutral strategy, which typically balances long and short positions, as a “defensive strategy that is not going to produce outsized gains.”
The fund also has a 3% cash weighting.
Hatteras has been managing the Alpha Hedged fund since it acquired Alternative Investment Partners LLC in July 2009.
The fund's management team still includes the original manager, Lee Schultheis, but the overall strategy and management of the fund has been enhanced to compete more aggressively against the HFRI Composite Index of hedge fund strategies.
From the time Hatteras took over management of the fund through the end of October, the fund has gained 9%, compared with a 7.2% gain by the HFRI Index over the same period.
The key to the strategy, according to Mr. Worthington, is to provide investors with returns that are less correlated to the broad equity markets.
“We want to reduce volatility and mitigate risk,” he said.
While the strategy's level performance history might not always stand up well against short-term market rallies, Mr. Worthington pointed out that the longer-term track record of the hedge fund benchmark holds up well against the stock market.
For example, the total return of the S&P 500 from January 1999 through June 2010 was just under 3%, while the HFRI over the same period gained 85%.
“Our objective is to create returns similar to the HFRI,” he said. “In doing that, over the long run, we can create more wealth than a broad equity market index.”
Portfolio Manager Perspectives are regular interviews with some of the most respected and influential fund managers in the investment industry. For more information, please visit InvestmentNews.com/pmperspectives.
