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.
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