A Hedge Fund for the Masses

Focus: FUNDS

Thurman Smith Image Thurman Smith Editor, Equity Fund Outlook

Thurman Smith, editor of Equity Fund Outlook, says a mutual fund that mimics long/short hedge funds’ strategies has been posting impressive returns.

TFS Market Neutral (TFSMX) is showing remarkable ability to counter the downside. If the market continues down, this fund could be a way to hold values, yet be in place with long positions to at least keep up with the market at the outset of the next turnaround.

At this long/short fund, the charter is to seek capital appreciation with low market correlation and lower volatility than would result from a long-only investment in the US equity market.

Over its 2.9 years, it returned 15.5%, annualized, vs. only 3.0% for the market. It gained 8.8% since the October high, a period in which the market declined 18.8%. “Market-neutral” means that a fund won’t move in step with the market because management balances a “long” portfolio with a “short” portfolio. However, TFS Market Neutral holds $3.00 in long positions for every $2.00 in short positions.

So, it is not surprising to see that in a rising market the fund rises, too. That structuring may not be strictly market-neutral, but since the market spends more time rising than falling, this deviation from purity is quite useful: It declined more than the market only once, in the July 20th- August 16th 2007 dip, a time when many other long/short operators were forced to liquidate positions.

Management informs me that they have refined their process to be less susceptible to what other players may be doing.