As the general public becomes increasingly familiar with hedge funds, a new investment approach is unfolding: the mutual fund that employs hedge fund strategies.
Stephen Roseman, CEO of Thesis Fund Management, is a former hedge fund manager and remains a proponent of their benefits, even as he delves into the world of mutual funds with his recently launched Flexible Fund.
Before providing a look into the Flexible Fund itself, Roseman laid out the primary differences between mutual funds and hedge funds. “Most hedge funds are structured as partnerships,” he said, “while mutual funds are, from a legal standpoint, trusts. Mutual funds are much more liberal, and anyone can invest in them.”
Most mutual funds are long only and most mutual funds are restricted in how much cash they can hold, which Roseman finds limiting. “If you think about what happened during the downturn,” he said, “you might have the most bearish managers in the world running mutual funds, but as a practical matter, they had no ability whatsoever to express that view because they couldn’t sell the portfolio and go to cash—that’s typically not permitted by the charter. That alone is one of the big differentiating factors between a mutual fund and a hedge fund. However, with hedge funds, it’s really within managers’ purviews to do what they need to do to protect the investors’ capital.”
Hedge funds generally offer investors more flexibility when it comes to choice—a difference Roseman illustrates with an example that hits home, both literally and figuratively. His scenario opens with a traditional mutual fund manager and a hedge fund manager, both standing in front of a Home Depot. He said, “If you said, ‘Go inside and pick one tool to build a house. I don’t care if it’s a saw, a screwdriver, or a hammer.’ Those are all fine tools, but they all have very specific purposes. You wouldn’t want to frame a house with a screwdriver, right? Similarly, you wouldn’t want to try to drive screws with a saw. Such is the life of a typical mutual fund manager, where they’re really constrained and bound by whatever set of rules were laid out for them within their charter.” Roseman explained, “Hedge fund managers have the ability to go into that store and buy whatever they want off the shelves to help them get the job done.”
Roseman recently launched The Flexible Fund: a mutual fund that is managed like a hedge fund. According to Roseman, The Flexible Fund is intended to give people exposure to global markets, which “are not necessarily the S&P, but with lower correlations to the S&P, because people typically have plenty of that.”
“The idea is to give people a tool to generate return while managing a risk in their portfolio,” he said. “It tends to be a much lower volatility fund than the broader market, or other funds out there. We generate the flexibility, hence the name, to really invest where we see fit from an investment opportunity standpoint.”
As for the development of investment ideas, Roseman and his team definitely do their homework. “We spend a lot of time reading, and we spend a lot of time looking at companies in different industries, and in different countries,” he said, “and opportunities present themselves because you find some company that’s been left for dead.” For example, a company might be faltering in the short-term whether for a missed earnings estimate or a misunderstood story, but after taking a hard look, The Flexible Fund may identify long-term potential for success.
Roseman said, “We can get exposure where we feel the best opportunities are. And the best opportunities may or may not be U.S.-exposed. So because we don’t feel compelled to be fully invested, we really only swing at fat pitches.”
Roseman also emphasized what he calls the “truism of risk.” He believes that the importance of risk management has escaped people in recent years. “To be clear, that doesn’t mean your investment can’t go up and down,” he said. “Having an investment go down is not a bad thing. If you like it, you can buy more of it.”