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July 2015, Funds In Registration

First Western Short Duration High Yield Credit Fund First Western Short Duration High Yield Credit Fund will seek a high level of current income and capital growth. The plan is to invest in a global portfolio of junk bonds and floating rate senior secured loans. The fund will be managed by Steven S. Michaels. The minimum initial investment is $1,000. The opening expense ratio for retail shares will be 1.2%. RiverNorth Marketplace Lending Fund RiverNorth Marketplace Lending Fund will seek “a high level of total return, with an emphasis on current income.” The plan is to invest in “loans to consumers, small- and mid-sized companies and other borrowers originated through online platforms.” That is, they’ll subscribe to loans through peer-to-peer lenders such as Lending Tree and Prosper.com. They urge you to think of this as a fund that might fit into the “high yield / speculative income” slot in your portfolio. They also, rightly, raise two red flags: (1) no one has ever done this before and so there’s no established market for trading these shares, which might well make them illiquid for rather longer than you like and (2) this is structured as a closed-end fund but will likely function as an interval fund; that is, you might have to request redemption of your shares then wait for a redemption window. That’s akin to the practice in hedge funds, since they also make money from the mispricing of illiquid investments. The fund will be managed by Philip K. Bartow and Patrick W. Galley. Mr. Bartow just joined RiverNorth after serving as “Principal at Spring Hill Capital, where he focused on analyzing and trading structured credit, commercial mortgage and asset-backed fixed income investments.” Mr. Galley is RiverNorth’s Alpha male. Details like purchase requirements and expenses have yet to be worked out. RQSI Small Cap Hedged Equity Fund RQSI Small Cap Hedged Equity Fund will seek total return with lower volatility than the overall equity market. The plan is to invest in a diversified portfolio of U.S. small cap stocks and ADRs, when they need exposure to a foreign stock, which will be selected using the Ramsey Quantitative Systems, Inc. quantitative system. The manager will use options, futures and ETFs to hedge the portfolio. The fund will be managed by Benjamin McMillan, formerly a manager for Van Eck Global’s Long/Short Equity Index Fund. The minimum initial investment is $2,500. The opening expense ratio will be 1.56% for retail shares. T. Rowe Price Emerging Markets Value Stock Fund T. Rowe Price Emerging Markets Value Stock Fund will pursue long term growth of capital. The fund will invest in “stocks of larger companies that are undervalued in the view of the portfolio manager using various measures.” The fund will be managed by Ernest Yeung. Mr. Yeung joined T. Rowe in 2003. Price describes him as having “joined the Firm in 2003 and his investment experience dates from 2001. He has served as a portfolio manager with the Firm throughout the past five years.” He’s also described as a “sector expert” on Asian media and telecomm stocks. I can, however, only find a four month fill-in stint as manager of T. Rowe Price New Asia Fund (MUTF: PRASX ) . Presumably he’s been managing something other than mutual funds and has done it well enough to satisfy Price. The opening expense ratio, after waivers, will be 1.5%. The minimum initial investment will be $2,500, reduced to $1,000 for tax-advantaged accounts. The prospectus is dated August 24, 2015 which suggests the launch date. Thornburg Better World Fund Thornburg Better World Fund will seek long-term capital growth. The plan is to invest in international “companies that demonstrate one or more positive environmental, social and governance characteristics.” They can also hold fixed income securities, but that’s clearly secondary. The fund will be managed by Rolf Kelly, who has been with Thornburg since 2007. Before that, he was a “reservoir engineer” for an oil company. The minimum initial investment is $5,000, reduced to $2,000 for various tax-advantaged accounts. The opening expense ratio is 1.83% for “A” shares, which also carry an avoidable 4.5% load. United Income and Art Fund United Income and Art Fund will seek income with long-term capital appreciation as a secondary objective. The plan is to invest in equity and fixed-income mutual funds (based on “performance, risk, draw downs, portfolio holdings, turnover, and potential concentration risk – easy peasy!) and up to 15% in potentially illiquid “art companies,” plus long and short ETFs for hedging. The fund will be managed by Doran Adhami and Itay Vinik of United Global Advisors. Mr. Adhami was a Vice President of Investments for UBS from 2005-13; Mr. Vinik was an intern there and is now, with “approximately three years” of industry experience, United Global’s CIO. He also helps manage the Ace of Swords Fund . The minimum initial investment is $500. The opening expense ratio has not been released; the existence of a 2% redemption fee and a 0.25% 12(b)1 fee have been established. Zevenbergen Genea Fund Zevenbergen Genea Fund will seek long-term capital appreciation. The plan is to invest in the stocks of 15-40 firms which are “benefitting from advancements in technology.” I’m certain that’s not nearly as dumb as it sounds. International exposure would come mostly through ADRs. The fund will be managed by Nancy Zevenbergen, Brooke de Boutray, and Leslie Tubbs. The adviser has about $2.4 billion in assets under management and all of the managers have experience as portfolio managers at regional banks. The minimum initial investment is $2,500. The opening expense ratio is 1.40%. Zevenbergen Growth Fund Zevenbergen Growth Fund will seek long-term capital appreciation. The plan is to invest in 30-60 industry leaders, described as firms which seek to invest in industry leaders with “strong competitive positioning.” International exposure would come mostly through ADRs. The fund will be managed by Nancy Zevenbergen, Brooke de Boutray, and Leslie Tubbs. The adviser has about $2.4 billion in assets under management and all of the managers have experience as portfolio managers at regional banks. The minimum initial investment is $2,500. The opening expense ratio is 1.3%.

Why The Best-Performing ETF Isn’t Always The Best Choice

By Andy Rachleff We get a lot of questions about why we choose certain exchange-traded funds in our portfolios and not others. Often, readers of our blog will point out that this or that ETF has outperformed one of the ETFs we recommend for our portfolios. We love getting feedback, but in this case, our readers are failing to see the forest for the trees. Specifically, they’re evaluating things in isolation, when what matters is how a particular ETF works in a portfolio. Sports fans know this idea well. Teams will sign players with superstar statistics, only to see their overall team performance suffer, as the player doesn’t mesh well with others. Conversely, teams may add role players, only to see their team overall performance soar. The same is true in portfolios: What matters is not just the returns of an individual ETF, but its relationship to the other funds in the portfolio. When Is A Hot Performing Fund A Bad Idea? When you construct a portfolio using Modern Portfolio Theory, you’re required to estimate three things: The expected returns of each asset class in the portfolio. The expected volatility of each asset class in the portfolio. The correlations between each asset class in the portfolio. Let’s imagine you have two portfolios, each of which owns 4 funds. Portfolio 1 holds funds A, B, C and D, while Portfolio 2 holds funds A, B, C and E. Over a one-year time period, we expect to see the following returns and volatility for each fund. (click to enlarge) As a stand-alone investment for a risk-tolerant investor, fund D appears very attractive: It has the highest expected return. But you also have to consider volatility and correlations when determining which ETFs will maximize the risk adjusted return for the overall portfolio. In this case fund D is reasonably correlated to the other funds, whereas fund E is entirely uncorrelated. It marches to its own drummer. (click to enlarge) If you run these portfolios through an optimizer, it will spit out the mix of assets that maximizes the portfolio’s return for every level of risk/volatility. The graph below displays the expected return at every level of risk for three different portfolios: One with just funds A, B and C (red line), one with A, B, C and Fund D (green line) and one with A, B, C and Fund E (blue line). In every case, the portfolio containing Fund E delivers more return per unit of risk than the competing portfolios – despite the fact that Fund D has a higher expected return than Fund E. (click to enlarge) The only case that can be made for the portfolio containing fund D is for investors that are extraordinarily risk-tolerant and searching out the highest absolute return. But even portfolios that are nearly 100% concentrated in fund D barely outperform our A/B/C/E portfolio (and certainly fail on a risk-adjusted basis). At Wealthfront, we evaluate ETFs in the context of their position in a portfolio. That places extra emphasis on funds with low correlations to other funds, and funds that can deliver consistent strong risk-adjusted returns. In a future post, we’ll discuss why we generally favor Vanguard ETFs over their competitors. But even with our overall predilection for Vanguard products, the important thing is the same: All selections must be made in the context of an overall portfolio. Even if that means you leave a hot-performer by the wayside. Disclosure The information provided here is for educational purposes only. Nothing in this article should be construed as a tax advice, solicitation or offer, or recommendation, to buy or sell any security. There is a potential for loss as well as gain. Actual investors on Wealthfront may experience different results from the results shown. Past performance is no guarantee of future results. Andy is Wealthfront’s co-founder and its first CEO. He is now serving as Chairman of Wealthfront’s board and company Ambassador. A co-founder and former General Partner of venture capital firm Benchmark Capital, Andy is on the faculty of the Stanford Graduate School of Business, where he teaches a variety of courses on technology entrepreneurship. He also serves on the Board of Trustees of the University of Pennsylvania and is the Vice Chairman of their endowment investment committee. Andy earned his BS from the University of Pennsylvania and his M.B.A. from Stanford Graduate School of Business.

Long/Short Hedge Fund Factors: Low-Cost Downside Protection?

By Wesley R. Gray, Ph.D. The holy grail of financial markets is finding strategies that have misaligned risk and reward characteristics. In the traditional view, investors try to do the following: Identify strategies that have high returns , then… find ways to get the exposure with the lowest risk possible . However, there is another angle on this concept… Identify strategies that have great risk-management benefits , then… find ways to get the exposure at the lowest cost possible . For example, you might buy out of the money puts, which in a crisis will finish in the money and generate insurance-like returns. But puts might be expensive… What if you could identify an asset where the cost of this insurance is de minimus or – better yet – you get paid to own the insurance? That is, if you commit capital, you will, in expectation, generate positive returns over time-and get an insurance benefit. This would be the holy grail! This line of thought is a bit unorthodox, but may lead to creative portfolio solutions. An applied example: The US Treasury Bond. First, let’s frame the question through the typical lens: focus on expected returns first, volatility second. Many consider the US Treasury Bond to have low expected return, but high potential risk. The low expected return is due to low yields, and the high potential risk is associated with the fact that if we were to move down the “banana republic” path, long bonds would arguably get crushed. Everyone seems to know this. Conclusion: Bad investment. Next, let’s frame the question through a different lens: focus on risk-management benefits first, expected returns second. When we look at the US Treasury Bond as a risk-management instrument, we identify some amazing historical benefits that are distinct from its expected return characteristics. The results below highlight the top 30 drawdowns in the S&P 500 Total Return Index from 1927 to 2013. Next to the S&P 500 return is the corresponding total return on the 10-Year (LTR) over the same drawdown period: (click to enlarge) The results are hypothetical results and are NOT an indicator of future results and do NOT represent returns that any investor actually attained. Indexes are unmanaged, do not reflect management or trading fees, and one cannot invest directly in an index. Additional information regarding the construction of these results is available upon request. Leaving aside (for a moment) questions about long-run returns, the US Treasury Bond suddenly looks more like an insurance contract, and less like a traditional investment. Again, with a traditional investment, we would tend to focus first on expected return and standard deviation. Conclusion: We’ve potentially identified an insurance contract that pays us to hold it. Moving from US Treasury Bonds to Hedge Fund Factors The example above is not meant to be a pitch for or against US Treasury Bonds. The analysis is merely meant to highlight how framing the investment decision can potentially lead to different conclusions. In our quest to find additional low-cost-or free-portfolio insurance assets, we started playing with common “factor” returns. As insurance contracts, do these exhibit characteristics similar to what we saw before with respect to Treasury bonds? The results were surprising… We examine 3 common hedge fund “factor” portfolios alongside the S&P 500 Index: SP 500 = SP 500 Total Return Index HML = The average of 2 value portfolios (small and large) minus the average return of two growth portfolios (again, small and large) MOM = The average of 2 high return portfolios (small and large) minus the average return of two low return portfolios (small and large) QMJ = The average of 2 high-quality portfolios (small and large) minus the average return of two low-quality portfolios (small and large) Results are gross of management fees and transaction costs. All returns are total returns and include the reinvestment of distributions (e.g., dividends). Data are from AQR and Ken French . Summary Statistics: Here are the returns (1/1/1963-12/31/2014): (click to enlarge) The results are hypothetical results and are NOT an indicator of future results and do NOT represent returns that any investor actually attained. Indexes are unmanaged, do not reflect management or trading fees, and one cannot invest directly in an index. Additional information regarding the construction of these results is available upon request. Conclusion: You got paid to hold the hedge fund factors over the long-term. Insurance Benefit Analysis: In the context of a traditional asset pricing model, such as the Capital Asset Pricing Model (CAPM), an asset that actually delivers returns when the rest of the world is blowing up (i.e., negative beta during treacherous times), should have a negative expected return because of the diversification benefits. For example, the CAPM says the expected return of an asset equals the risk-free rate plus beta times the expected excess return of the market portfolio: r a = r rf + B a (r m -r rf ) In this equation, if beta is negative, then the asset could earn negative returns and the investor should be happy owning it. For example, let’s say rf=3%, Rm-rf= 4%, and B=-1. The expected return = -1%. Hence, under CAPM, you have to pay for an insurance contract. Yet as the analysis above highlights, all of these L/S factors have positive carry. In a traditional asset pricing framework, these assets should not act like portfolio insurance. But how do these strategies perform as insurance contracts? When we look at the worst 30 drawdowns on the SP 500 since 1963 we see a very interesting pattern – Factors tend to rip higher during crisis. In other words, hedge fund factors look and feel like insurance contracts that pay off during chaos. (click to enlarge) The results are hypothetical results and are NOT an indicator of future results and do NOT represent returns that any investor actually attained. Indexes are unmanaged, do not reflect management or trading fees, and one cannot invest directly in an index. Additional information regarding the construction of these results is available upon request. Conclusion: Hedge fund factors are VERY interesting in a portfolio context. Original Post