Key information document Practice document Page 1 of 3
Larch Multi-Strategy Alternatives Fund Class A, accumulating · a UCITS fund · made up for this lesson
What is this product? The fund uses four kinds of strategy: managed futures, equity long/short, relative value and event driven.1
To profit when a share falls it uses derivatives; it never sells shares it does not own.2 Its exposure through derivatives is never more than the fund’s own value.3
It aims for returns that move differently from share markets.4
What are the costs? How long should I hold it, and can I take money out early? You can buy or sell on any working day.6
This paper is made up for Red Start Education and describes no real fund. Past performance does not predict future returns.
Line 1 · Four strategies
The four families “The fund uses four kinds of strategy: managed futures, equity long/short, relative value and event driven.”
Most hedge-fund strategies fall into four families. Managed futures follow trends up or down in many markets. Equity long/short owns some shares and bets against others. Relative value looks for prices that are out of line with each other. Event driven trades around mergers and other company events.
It lets the manager Use any of the four, in any mix It never may Leave the four without saying so Read it slowly Four names, four different engines. Ask which one does most of the work.
Check it yourself Find which of the four families your own fund uses.
Line 2 · Betting on a fall
A falling view, through derivatives “To profit when a share falls it uses derivatives; it never sells shares it does not own.”
Inside a UCITS fund these strategies must follow Europe’s fund rules. A fund cannot sell shares it does not own; it bets against them through derivatives instead.
It lets the manager Profit when a share falls, through a derivative It never may Sell shares it does not own Read it slowly The rule changes the tool, not the idea: the fund can still take a falling view.
Check it yourself In your own fund’s prospectus, find what its derivatives are used for.
Source: UCITS Directive 2009/65/EC, article 89
Line 3 · The cap
How far derivatives can stretch it “Its exposure through derivatives is never more than the fund’s own value.”
Its exposure through derivatives is capped at the fund’s own size. Some hedge-fund ideas need more borrowing, slower exits or less transparency than the rules allow. So a regulated version is often a lighter copy, and its results can differ a lot from the hedge funds it is modelled on.
It lets the manager Use derivatives up to the fund’s own value Read it slowly A lighter copy is a different fund. Judge it as what it is, not as the hedge fund it is modelled on.
Check it yourself If your own fund compares itself with hedge funds, look at how its results differ.
Source: UCITS Directive 2009/65/EC, article 51(3)
Line 4 · The aim
Zig when shares zag “It aims for returns that move differently from share markets.”
A strategy that zigs when shares zag can steady a portfolio, but only if it keeps doing so in the year you need it, and only if its costs do not eat the benefit. Many such funds have lagged a simple mix of shares and bonds over long periods.
It lets the manager Try to move differently from shares It never may Promise it will in the year you need it Read it slowly The test is a bad year for shares: what did this fund do then?
Check it yourself Find your own fund’s return in a year shares fell, beside a simple mix of shares and bonds.
Line 5 · What it costs
Well above an index fund “Ongoing costs, each year”
These funds usually charge well above an index fund, often with a performance fee on top. The KID tells you the yearly costs; compare them with what the strategy has to earn just to cover them.
It lets the manager Take 1.5% a year, and a performance fee on top It never may Leave a cost out of this table Read it slowly Two fees mean two ways to pay: one every year, one in the good years.
Check it yourself Add up every cost in your own fund’s KID and set the total beside an index fund’s.
Line 6 · Getting your money out
Out on any working day “You can buy or sell on any working day.”
Under UCITS rules you can take your money out at least twice a month, usually every day. Slower exits are one of the things a regulated copy cannot have.
It lets the manager Pay you out on any working day It never may Keep your money longer than the rules allow Read it slowly Easy exits are part of what the wrapper gives you. They also limit which strategies fit inside it.
Check it yourself Find the dealing days in your own fund’s KID or prospectus.
Source: UCITS Directive 2009/65/EC, article 76