The objective of the
New Century Alternative Strategies Fund (NCHPX) is to generate hedge-fund-like returns without all the messy details in-volved in investing in actual hedge funds.
This is something that managers of registered mutual funds have been striving to accomplish with varying degrees of success for years. Some have applied long-short strategies and market-neutral techniques. Others have used leverage or em-ployed separately managed portfolios designed to mimic the performance of a particular hedge fund subcategory.
The $130 million New Century fund, which is among the $2 billion worth of investment vehicles managed by
Weston Financial Group Inc. in Wellesley, Mass., aims to mimic the returns of a hedge fund of funds.
"We believe alternative investments represent a separate asset class that has been largely limited to institutions and endowments," said Wayne Grzecki, president of Weston Financial.
"What we set out to do was replicate the performance of hedge fund of funds in a mutual fund format," he added. "This is something that is scalable for individuals and larger investors."
PUT TO THE TEST
The fund, which has a four-star rating from Morningstar Inc. of Chicago, has certainly held its own among its peers in the moderate-allocation category.
Over the one-year period ended March 13, the fund climbed 4.6%, compared with 0.2% for the average fund in its category.
Its three-year annualized return was 7.6%, versus 5% for its average peer. Meanwhile, its five-year annualized return was 11.1%, compared with 9.5% for its average peer.
The fund also stacked up to the most recent performance data on hedge funds by gaining 4.2% during the 12-month period through the end of February.
The Greenwich Investable Hedge Fund Index declined by 0.1% over the same period. The Standard & Poor's 500 stock index, meanwhile, declined 3.7%, and the Lehman Brothers Aggregate Bond Index gained 7.3%.
"This fund has now experienced two strong tests," said portfolio manager Ron Sugameli, citing the 2002-2003 bear market period and the more recent market volatility since Feb. 2007.
Mr. Sugameli said he is meeting his objectives to provide investors with lower volatility and above- average returns through broad diversification in a portfolio made up mostly of mutual funds.
With a blend of 45 underlying mutual funds, exchange traded funds, closed-end funds and some structured notes, the portfolio will expose investors to thousands of individual securities.
The broad diversification — which some might characterize as too much diversification — is managed by allocating assets across 10 investment categories.
The categories are convertible arbitrage, merger arbitrage, long-short equity, option hedged, asset allocation, global macro, distressed, real estate, high yield and natural resources.
Because registered mutual funds can't invest directly in hedge funds, Mr. Sugameli creates artificial exposure to the hedging categories by investing in groups of mutual funds that he believes will produce comparable returns.
To capture the long/short equity exposure, for example, the fund invests in six underlying mutual funds that concentrate in the strategy.
ON TARGET
The 10 categories were developed largely by studying correlations and volatility. From there, Mr. Sugameli determines target weightings for each category, as well as an acceptable range of exposure.
Convertible arbitrage, for example, has a current target weighting of 5%, and a range of between 4% and 15%.
Global macro, the largest category allocation, has a target of 16% and a range from 5% to 20%.
"To help determine the targets, I follow the returns of the categories on a weekly basis" Mr. Sugameli said. "I'm looking at performance in various market conditions, relative volatility and fundamental valuations."
Once the target exposure is determined, the strategy looks at the individual mutual funds, studying criteria such as manager tenure, risk-adjusted re-turns, expense ratios, consistency of returns and the size of the fund.
As might be expected, this kind of strategy comes with higher overall management fees, but Mr. Sugameli justifies the fund's 2.21% expense ratio by comparing it to hedge funds of funds.
"It really depends on the lens you're looking at the fund through," he said. "It's extremely cheap in the world of hedge funds."
Questions? Observations? Stock tips? E-mail Jeff Benjamin at [email protected].
