Misclassified fund draws huge assets, then falters

A cautionary tale about reading the prospectus

Feb 16, 2017 @ 12:32 pm

By John Waggoner

+ Zoom

The Catalyst Hedged Futures Strategy Fund (HFXIX) was up 6.2% last year, head and shoulders above the average managed futures fund, which fell 2.8%.

Performance like that caught investors' eyes. The fund's assets soared from $1.2 billion in 2015 to $2.2 billion at the end of 2016.

Just one problem: It wasn't a managed futures fund.

"It was miscategorized," said Morningstar (MORN) analyst Jason Kephart, noting that Morningstar analysts don't cover the fund. The Catalyst fund uses put and call options on Standard & Poor's 500 stock futures, with the aim of reducing volatilty and overall correlation to the blue-chip index. Morningstar moved the fund into the options writing category Feb. 1, Mr. Kephart said.

Presumably, the fund's name had something to do with its mislabeling, since it had "futures" in it. And when the fund converted from a hedge fund to an open-end fund in September 2013, Morningstar didn't have an options writing category, said Jerry Szilagyi, CEO of Catalyst Capital Advisers.

"That's not the best fit, either," he said. "The fund is unique. There really isn't a good category for it."

But even as an options writing fund, its 2016 record was good: Morningstar says the average options writing fund gained 5.5%.

Investors who didn't pay attention, however, were in for another shock. The fund has fallen 14.1% the past week, versus a 2.5% gain for the S&P 500.

What happened?

"This is the worst environment for this kind of strategy," Mr. Szilagyi said. "The worst environment is a rapidly rising market with falling volatility. It's not unusual for the strategy. We've been very consistent in communicating that."

The fund has had similar drawdowns in the past, although not as large, he said.

So far, the fund has not been hit by redemptions, nor has it been hit by margin calls, Mr. Szilagyi said.

"Market conditions were unfavorable, and we got out to limit future losses," he said.

And, he notes, the fund is mainly invested in cash at all times.

Although the fund hasn't marketed itself recently — Mr. Szilagyi said management was happy with its current level of assets — its past markting had been aimed at investment advisers.

And for advisers, the fund's recent history is a cautionary tale, said Mr. Kephart.

"Using a fund category is a fine starting point, but you still have to read the prospectus, talk to the managers and read the fund's literature," he said.

0
Comments

What do you think?

View comments

Recommended for you

Featured video

INTV

How litigation has changed the 401(k) market

Deputy Editor Bob Hordt discusses the lasting impact that a flood of lawsuits brought against major companies and their 401(k) plans has had for people serving the retirement market.

Video Spotlight

Are Your Clients Prepared For Market Downturns?

Sponsored by Prudential

Recommended Video

Path to growth

Latest news & opinion

Jerry Schlichter's fee lawsuits have left an indelible mark on the 401(k) industry

After a decade of litigation, fees are lower and retirement plans are more transparent. But have the lawsuits gone too far?

10 best financial adviser jokes

How many financial advisers does it take to screw in a lightbulb?

With margins crashing, broker-dealers look to merge: report

Increased regulation is straining profit margins among broker-dealers, sending many of them into the arms of their bigger brethren.

Hackers may have profited from SEC breach

The hack of the agency's Edgar filing system occurred in 2016, but the regulator didn't conclude until last month that the cybercriminals may have used their bounty to make illicit trades.

Top 10 financial firms ranked by investor satisfaction

Find out which firm took the top slot for overall investor satisfaction for the second year in a row.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print