The Alpha Fund One Month In

The Alpha Fund One Month In

The new Montgomery Alpha Fund has just completed its first month of live trading, returning a pleasing 3.24 per cent for August after all fees. Given our target for the Fund is to return 6-8 per cent above the cash rate annually, this is well ahead of what we might consider “normal”.  There are a couple of observations around risk and return worth making here.

Let’s start with risk.  To recap, the Alpha Fund is designed to have lower risk than the overall equity market.  We aim to do this by eliminating all or most of the “market” risk through a market neutral construction, and we also use numerical techniques that allow us to nominate the level of risk we are willing to bear, and select the optimal mix of positions such that we get the best possible return for that nominated risk.

This should allow us to deliver a pleasing balance of risk and return, but there is still a material amount of risk involved, particularly as it relates to stock selection.  For every $1 invested, the Alpha Fund effectively puts $2 to work in the market in both long and short portfolios, and so if our stock selections are out of kilter with the market, the impact is potentially large.  On the flip side, if our selections are in kilter, then the results can be quite strong.

This becomes important during reporting season when things start moving around rapidly.  Even if the overall market doesn’t move by much during August, the winners can rise quite sharply, and the losers can fall even more sharply.  In this case, the Alpha Fund found itself on the wrong side of the ledger in some cases, but it got more right than it got wrong, and this resulted in an overall result that was well ahead of the expected norm.

So there are three things we can say about the performance of the Alpha Fund during August;

• It was significantly higher what we estimate to be the “normal” long run average;

• However, it was well within the range of outcomes that we might expect in any month given the risk involved. Some outcomes will be good, others not so much; and

• It doesn’t tell us anything about what to expect next month, or the month after.

To summarise, as is the case with every fund we manage, it’s important to keep in mind the long term, and not focus too much on last month.

The Montgomery Alpha Plus Fund is priced monthly and the next subscription date is 1 October 2016. To invest, please complete the Application Form by 4pm Tuesday 27 September 2016.

MORE BY TimINVEST WITH MONTGOMERY

Tim joined Montgomery in July 2012 and is a senior member of the investment team. Prior to this, Tim was an Executive Director in the corporate advisory division of Gresham Partners, where he worked for 17 years. Tim focuses on quant investing and market-neutral strategies.

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