Portfolio Manager Perspectives

Jeff Benjamin

Eric Newman: "We only want to offer our best stuff'

Jan 17, 2010 @ 12:01 am

By Jeff Benjamin

After more than five years of solid performance, including a run last year that saw assets more than double to nearly $1 billion, the TFS Market Neutral Fund (TFSMX) is introducing a “hard close” and will stop taking investments Friday. The decision, filed with the Securities and Exchange Commission on Jan. 7, follows a “soft close” that limited access to existing investors as of June 30. “We only want to offer our best stuff, and in this case, the demand for our product has exceeded our ability to find new ideas,” co-portfolio manager Eric Newman said. The fund, which has a five-star rating from Morningstar Inc., is the flagship product of TFS Capital LLC and is co-managed by Rich Gates. From its September 2004 inception through the end of 2009, the fund generated an annualized return of 9.8%, which compares with a 2% annualized return by the S&P 500 over the same period. According to Mr. Newman, the fund's popularity among investors kicked into high gear after it lost just 7.3% in 2008, while the S&P 500 fell 38%. Last year, when the index gained more than 20%, the fund was up 16.6%. “Everybody says they can protect on the downside, but it takes a bear market like 2008 to prove you really can protect,” Mr. Newman said. “People started noticing.” The strategy is purely quantitative, highly diversified and includes an annual turnover ratio of about 500%. TFS doesn't share a lot of the details behind the proprietary-trading strategy, beyond saying that it calculates and analyzes everything from basic financial data to third-party-research data and bond ratings. “We're always looking for new ways to analyze stocks, because we're always looking for new sources of alpha,” Mr. Newman said. The pursuit of that alpha is the main reason that the fund is forced to stop taking in money from investors.

“Most of the alpha we're finding is in the small-cap space, and we're dealing with limited capacity,” Mr. Newman said.

On any given day, the fund will have upward of 2,500 positions, which includes a steady 33% net-long bias.

At the end of last year, the fund had 1,706 long positions and 1,096 short positions.

Reopening the fund will require an expansion of research to help the strategy migrate into more larger-cap names.

Mr. Newman said that the idea of simply launching a fund to handle the growing demand isn't an option, because it would end up being a second-tier fund.

Meanwhile, investors who are truly hungry for a taste of the TFS quantitative model might consider the $23 million TFS Small Cap Fund (TFSSX), which was launched in March 2006.

The long-only strategy uses the same quantitative research but doesn't offer the market-neutral exposure, meaning that it won't likely provide the same level of downside protection.

As far as the upside goes, the fund gained 65.4% last year, which compares with a 27.2% gain by its benchmark Russell 2000 Index.

0
Comments

What do you think?

View comments

Most watched

Events

Finding innovation in your firm

Adam Holt of AssetMap explains how advisers understand they need to grow, but great innovation may be lurking right under your nose.

Events

Finding your edge from Tony Robbins

Guru Tony Robbins has helped a lot of people, but armed with his psychology Financial Advisor Josh Nelson has helped his practice soar.

Latest news & opinion

The growth of factor-based investing

Advisers are making decisions about clients' portfolios by using the same characteristics that govern factor-based ETFs.

Finra makes its list to target hundreds of rogue individuals

The regulator sees patterns in the behavior and disclosures of high-risk brokers.

LTC insurer offering co-pays to blunt soaring premium increases

John Hancock policyholders would get a discount on their premium in return for agreeing to pay a bigger portion of their claims in the future.

Goldman Sachs acquires United Capital

After a payday of $75 million or more, CEO Joe Duran plans to join Goldman in a senior position.

Private equity loves IBDs, but will that last?

Three big acquisitions in less than a year signals renewed life in the formerly beleaguered industry.

X

Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting investmentnews.com? It'll help us continue to serve you.

Yes, show me how to whitelist investmentnews.com

Ad blocker detected. Please whitelist us or give premium a try.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print