A hedge fund that actually hedges risk

Date: Thursday, November 20, 2008
Author: Rob Carrick, Globe and Mail

This is how bad things are for hedge funds right now. On the CanadianHedgeWatch.com website, a hub for the hedge business, the lead article one recent day was headlined "The hedge fund collapse."

The article, which originally appeared on the Portfolio.com website, tells us that as many as half the 10,000 hedge funds that existed earlier this year could fail or be wound up in the next 12 months. Outsmarted by the financial crisis of 2008, some prominent hedge fund managers lost 20 to 65 per cent of their assets even before October came. "The hedge fund mystique died with the crash of 2008," the article says.

The mystique is dead for sure, but hedge funds are not. The Horizons Global Contrarian Fund proves it.

What we have in Horizons Global Contrarian is a hedge fund of the old school. Rather than acting as a supercharged equity fund willing to push all risk boundaries, it tries in a measured and conservative way to make money no matter what the stock markets are doing.

So while the S&P/TSX composite index and S&P 500 were both down about 17 per cent in October, Horizons Global Contrarian made 6.6 per cent. "We are not correlated to the stock market," said Stephen Briese, a money manager with HCS Management who helps run the Horizons fund. "Historically, our results have been positive in both up months and down months, and up years and down years."

Horizons Global Contrarian is unlike most hedge funds in that it's widely available to investors and not reserved for those with a high net worth. But it's very much a classic hedge fund in its use of futures markets to generate returns that are independent of stocks.

Futures are bets on what direction commodities, currencies, interest rates or stock indexes will move in the future. There's a potential with futures to lose more money than you started out with, which means the risk level is high. Anyone remember a mutual fund called AGF Managed Futures? It was terminated more than a year ago after losing more than half its value over a 12-month period and posting a compound average annual 10-year loss of 21.6 per cent.

Mr. Briese runs Horizons Global Contrarian in a way that seeks to control the risk of investing in the futures market. First off, the fund won't participate in a particular market if it's too volatile. "In a lot of the markets that have been in the news lately - metals, gold, petroleum - volatility has been so high since May that we have not executed any trades," he said.

Second, the fund will pull out of an investment in a particular futures market if it falls more than 1.5 per cent. Third, the fund will "go flat," or pull out of all investments for the rest of the month, if it loses more than 5 per cent in a day.

"We're protected from anything close to a double-digit down month," Mr. Briese said. "Five per cent is our cutoff." Horizons Global Contrarian was launched in February, 1991, and has made a compound average annual return of 2.3 per cent since then. This record isn't particularly relevant right now, given that Mr. Briese didn't arrive on the scene until earlier this year.

Still, this unimpressive long-term number does hint at one of the drawbacks of this fund. It's the management expense ratio, which according to Globefund.com stands at 3.7 per cent. The fund can also earn a performance fee equivalent to 20 per cent of returns above a certain threshold.

This, again, is a classic hedge fund. Provide a specialized kind of investing experience and charge big time for it.

So far, so good. The fund netted 14.3 per cent in the three months to Oct. 31, while the average Canadian equity fund lost 26 per cent and the average global equity fund lost almost 21 per cent. The fund is down a bit for the year to date, but Mr. Briese's trading strategy wasn't fully implemented until midyear.

There's no way to know if Horizons Global Contrarian can continue to make money in a down market, or if it can deliver competitive returns in an up market. This was the problem with the fund in the past bull market - it almost entirely missed out as conventional equity funds soared.

For now, though, Horizons Global Contrarian is doing exactly what a hedge fund should. With stock markets plunging, it has found a way to make some money.

***

At a glance

PROFILE: Horizons Global

Contrarian

ASSETS: $37-million

Offered by: JovFunds

Minimum Purchase: $5,000

MER: 3.76 per cent (performance fees may add to this)

Category: Alternative strategies

Suggested Portfolio Weighting: 5 to 10 per cent

Strategy: Invests in futures markets, and can take short positions where it benefits from falling prices.

RRSP eligible: Yes

Availability: Everywhere but Quebec