Wednesday, June 5, 2013

Invest Side-By-Side with Me

Inspired by Larry Swedroe’s post describing side-by-side arrangements where a mutual fund invests in the same assets as a hedge fund, I’ve decided to start my own side-by-side arrangement. Just as these mutual funds give small-time investors access to the investment choices of hedge fund managers, my arrangement will give investors access to my stock-picking.

Just take a look at the chart of my 1999 portfolio return and you’ll see why this could be a great deal for investors. They will get access to a fund that contains my stock picks. The best part is that I won’t charge any management fee.

Here’s how it will work. Every 3 months, I’ll buy shares in my top 100 stock picks using a mixture of my personal assets and fund assets. After the 3 months are up, I’ll allocate a non-random set of shares to my personal account (based on purchase price) in proportion to how much of the purchases were made with my money. The rest of my purchases go to the fund. Then I do it over again with another 100 stock picks.

Fund investors are guaranteed to get results based on stocks personally picked by me. Who’s in?

In case it’s not obvious, this is a joke. I’ve exaggerated some of the abuses Swedroe described in his article on side-by-side arrangements.

22 comments:

  1. Replies
    1. I guess the catch is in the non-committal phrase "a mixture of my personal assets and fund assets". At the end of the three months, the hedge fund operator may retro-actively decide on a mixture that is personally beneficial (e.g. "our shares did really well over the past three months. guess what? 99% of purchases were made using my personal assets!")

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    2. @Glenn: I need lots more people who don't understand and are willing to commit money!

      @Anonymous: Suppose that my personal assets make up 1% of the fund and I buy 100 different stocks in equal dollar amounts. After 3 months, I'm free to choose the top performing stock and allocate it's shares to my personal account. The fund then gets the 99 "dogs".

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  2. I'm all in.
    Where do I send the check?

    Regards

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    1. @Mark: That's 2! This mutual fund business is easier than I thought :-)

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  3. Me-sa thinks-a you-sa makes-a funny!

    Me-sa say OKEY-DOKEY!

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    1. @Jar Jar: I'll take that as a third investor. Now we're rolling. And with the BCM on board, the world will follow.

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  4. I thought one of the "advantages" of hedge funds is that they can invest in ways that aren't allowed in a regular mutual fund. A mutual fund would never be able to fully replicate many hedge fund strategies.

    With regards to these side by side funds it sounds like they follow the stocks chosen by the hedge fund but not the same weightings.

    On that basis I'm going to have to point out that there is a side by side fund far superior to your offering. It holds 95% of the stocks owned by every hedge fund focused on the US market. The managers involved are obviously quite brilliant since it's beaten the average hedge fund recently and there are charts showing that it is likely to continue doing so. It trades as an ETF with the symbol VTI.

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    1. @value Indexer: Shhhh! Don't fill my potential investors' heads with nonsense about passive investing with VTI. If everyone figures out that VTI beats my fund and hedge funds, where will that leave me? :-)

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    2. You can always create a fund that imitates it. And since the returns are so good, I would say that warrants a base fee of 3% and a performance bonus of 30%. You would deserve it for beating all the other managers!

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  5. I'm getting tired of boring passive investing. I'm in.

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    1. @Mike: With a fourth investor on board, I assume we're reaching some sort of tipping point. The next thing for me to work out is if I start with my personal assets 1% of the size of the fund, how many three month iterations is it expected to take before I have about the same amount of money as the fund.

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  6. I'm in too!

    I like your "Mj" in the orange stop sign logo so you have to be legit. Should we start with a blank cheque?
    Look out Tom Bradley! Here comes MJ Funds.

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    1. @Paul: Blank cheques should be accompanied by a hint of how much money is in your account. Tom Bradley would probably come up with some complicated ethical issue with this fund. I say just keep staring at the logo and don't listen.

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    2. Geez Mike. If you do this we're screwed. Nobody will come to Steadyhand ... expecially if you get off to a good start and advertise your 1 week numbers. I implore you - don't do it Mike. Leave it to us less creative types.

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    3. @Ethical One: Describing yourself as less creative doesn't sound positive, but when I think of financial creativity, I first think of Bernie Madoff. Less creative sounds good.

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  7. I need to know the MER first. If it's 3% or higher, I'm in. I know that the higher the MER the more experienced and qualified the management is and the more money I can make. (My bank Financial Advisor explained all this to me.)

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    1. @Bet Crooks: I think I'll offer investors individual choice. You can have an MER of 0.25%, 1%, 2%, or 4%. That way people can choose how experienced and qualified they want me to be.

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    2. 4%?! My cheque's in the mail!

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  8. The funny thing is, for all their blather about sophisticated investment strategies, in his book Successful Investing Jacques Lussier found he could replicate, after the fact, hedge fund returns using combinations of simple stock and bond indices.

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    1. @Canadian Investor: Because hedge funds as a group have historically trailed the market, we could replicate their average returns using ETFs and having the occasional bonfire of $20 bills to get the returns down to match the hedge funds.

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  9. A good exchange. A particularly liked your offer of MERs to choose. Individual investor have a right to choose ... the way they feed investment companies and hedge funds.

    Couple of offers like this and you can start a book on investing. A funny one, for a change.

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