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Hedge Funds for the Little Guy

Last update on: Jun 19 2020

Our diversified portfolio of alternative mutual funds continues to do its job. We designed it to deliver solid long-term returns without the volatility of the stock market indexes. That is what we are getting.

Long-time readers know that the Alternative Portfolio is a collection of mutual funds that use investment strategies similar to those used by top hedge funds. It shows that small investors can benefit from many of the same investment strategies as the wealthy.

The portfolio lagged the S&P 500 a bit in the last quarter of 2004 and for the calendar year. More importantly, it has a beta of only 0.42. Beta is the correlation between movements of the S&P 500 and the portfolio. A beta of 1.0 means the two are perfectly correlated. Our low beta of 0.42 means the portfolio is not captive to the gyrations of the stock index. Yet, over the long-term it has a higher return than the S&P 500.

Our Alternative Portfolio managers currently are invested 50% in U.S. stocks. About 17% is in cash, and 25% is in different types of bonds, including international bonds. International stocks are 6.5% of the portfolio.

The portfolio is designed to lag stock indexes in strong rallies but outperform it most other times and for the long term. There were several laggards in the portfolio in 2004.

Clipper Fund owns only 32 stocks and is 25% in cash. The cash was a drag compared to the S&P 500, and two of its top three holdings suffered from accounting controversies: Freddie Mac and Fannie Mae. These are long-term holdings of this deep value-style fund. Clipper’s multi-year returns continue to be well above those of the S&P 500.

Hussman Strategic Growth had about half the return of the S&P 500 in 2004, because it hedged its portfolio against a possible market decline. The fund’s managers adjust its hedging based on market valuations and market trends. Their analysis is that the market is overvalued and that market trends are slightly positive.

Laudus Rosenberg Global Long-Short Equity follows quantitative models to buy undervalued stocks and sell short overvalued stocks. It tends to shine during general market declines and tread water at other times.

Price High Yield is closed to new investors and can be replaced with Neuberger & Berman High Income. Oakmark Equity & Income also is closed to new investors, but can be purchased directly from Oakmark. For those who don’t want to do a direct purchase, the best alternative is to double up in FPA Crescent.

RW “Hedge Fund” Portfolio
Annualized Returns as of 12/31/2004
Fund % 3 mos. 1-Yr. 3-Yr. 5-Yr.
Portfolio Total 6.22 9.97 10.9 14.1
Laudus Ros Gl L/S Eq 10% -0.45 -0.36 5.21 N/A
Hussman Str. Gr. 10% 3.87 5.16 13.2 N/A
Clipper 25% 8.51 5.87 6.08 12.6
Berwyn Inc. 10% 3.24 7.96 11.1 10.7
FPA Crescent 10% 3.77 10.2 13 15.3
Oakmark Eq & Inc. 10% 5.11 10.4 9.99 13.5
Third Ave. Value 10% 12.3 26.6 13.8 12.8
Price HY 10% 4.53 10.4 11.7 7.43
Am Cent. Intl. Bond 5% 10.7 13.1 18.8 10.2



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