Good Hedge Fund Alternative (TFCVX, TFCIX)

Third Avenue Management, the deep value investing firm, recently issued a new mutual fund that is a better, lower cost alternative to a hedge fund investment. Third Avenue Management is run by Marty Whitman, a veteran value investor who has previously worked as a turnaround specialist for bankrupt companies.

Mr. Whitman is an adjunct faculty member at the Yale School of Management where he has taught a finance course for 30 years. Mr. Whitman is a CFA charter holder.

The new mutual fund is called the Third Avenue Focused Credit Fund. There are two share classes available:

-Investor class (ticker:TFCVX): Minimum investment =$2,500 

     Annual Expense Ratio: 1.40%

-Institutional class (ticker:TFCIX): Minimum investment= $100,000 

     Annual Expense Ratio: 0.95% 

The new fund will take an opportunistic approach, use bottom-up, fundamental analysis and invest across the capital structure. It will have a wider mandate than high-yield or junk bond funds because it can also invest in bank loans, convertible securities and in bonds already in default. The fund will use an event-driven strategy and look for catalysts that can drive values higher while minimizing downside risk.

The recovery rate for defaulted bank loans has been running around 55% to 60%, while for high-yield debt or junk bonds it has only been around 15%-20%.

The new fund will be run by an investment team headed by Jeffrey Gary who was hired by Third Avenue Management in 2009. Mr. Gary has over 20 years of investment experience in high yield and distressed investment strategies. Prior to joining Third Avenue, he worked at BlackRock Financial as head of the high-yield and distressed investment team.

This fund has several advantages over a hedge fund-

  • – Lower management fees and no performance fee. If a typical 2-and-20 hedge fund earned a gross return of 20%, you would only net around 14%. If TFCIX earns a 20% gross return, you would net 19%.
  •  Hedge funds are only available to accredited investors. A non-accredited investor can buy TFCVX with only $2,500.
  •  Mutual funds have excellent transparency. The NAV is published every day. Hedge funds are notorious for lack of transparency and many are like a “black box”. You will generally only get a monthly or quarterly letter.
  • Better liquidity and access to your money. The fund has a 2% exit redemption fee for holdings under one year, but after the initial one year holding period, you can withdraw your money at any time. Most hedge funds have poor liquidity and withdrawing money from a hedge fund can be difficult, especially when markets are undergoing distress.

The fund should benefit from the “new fund” effect. Several studies have shown that new funds from experienced managers tend to outperform the overall market and their peer group during the first year of their existence. New funds have fewer assets and no distraction from legacy positions or troubled issues. Managers of new funds do not have to make sell decisions and they can concentrate new holdings in their best ideas. They often enjoy significant fund inflows that help to support earlier buys in the portfolio.

Full Disclosure: I am long TFCIX.

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5 responses to “Good Hedge Fund Alternative (TFCVX, TFCIX)

  1. Closed-end_Trader

    I agree this Mutual fund is one of a few worth investing in. I believe the bank loan asset class have a high relative return to risk. They have however recovered substantially this year from extremely distressed levels last year during the meltdown. If you like this asset class, as an alternative consider FCT a pureplay senior loan fund. It is at a discount of ~19% to NAV or ~5% greater discount than any of its peers probably due to its low distribution rate. Please note: I am long FCT.

    • Closed-end-Trader-

      I agree with you and I also have a position in FCT, but it is smaller than my position in TFCIX.

      One advantage of the mutual fund is better liquidity on larger purchases (e.g. no bid-asked spread). I just took a look at FCT which is currently trading at 10.81.

      The bid-asked is 10.80-10.82 with 3,000 shares on each side. So FCT would be a reasonable purchase up to around $30,000. But for a larger purchase of $100,000 or more your buying would move the price and the cost could easily be 0.3% or more.

  2. Pingback: High Yield Bonds- Amazing Trend Persistence « Quant Investor’s Blog

  3. Pingback: Strong Trend Persistence in TFCIX and FFRHX « Quant Investor’s Blog

  4. Pingback: Another Win Streak for Third Avenue Focused Credit Fund | Quant Investor’s Blog

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