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Monday, February 03, 2014

This Alts Fund Pays for its Hedging

Reported by Tommy Fernandez

Fundsters say that equities still have good stuff to offer investors, but getting these Nervous Nellies back into the market can be a killer.

One approach, short of therapy, has been to offer such gun-shy investors alts products with downside protection. The problem is that, like any insurance coverage, downside protection can be costly -- making some nervous customers downright intransigent when it comes to buying alts.

One firm is trying to ease the bite of some of these investment insurance costs with a built-in approach for continuously buying and selling options.

The firm, Rumson,N.J.-based Larkin Point INvestment Advisors, has marketed for nearly two months now the Larkin Point Equity Preservation Fund, which utilizes two hedging strategies -- with one of these strategies more or less paying for the costs of the other.

The first strategy utilizes a portfolio of ETFs to generate a base of diversified equity holdings. The fund's managers then buy purchase put options which having a term to expiration of more than one-year to limit downside if the stock market collapses. They adjust the level of protection as the market level changes, and maintain this protection continuously.

"We will actually purchase downside protection through long-dated puts. We do that systematically. We have protection on at all times. But that creates a drag on the portfolio. That obviously drags down on performance and cost," Larkin chief investment officer Michael Winchell, a former PM for Mariner VCL Asset Management, told MFWire.

The fund's second component, a hedged income strategy has been designed to try to pay for this continuous protection. Winchell, who PMs the fund with Charlie H.C. Hon, regularly sells short-term put options and short-term call options to generate income. The goal is to earn at least 60 basis points in income per month to cover, on average, the cost of the protection. He admits that they will not be able to do this every period, but he does expect the strategy to cover the cost of protection over extended periods.

More about the strategies can be found in this SEC filing.

Larkin Point's president, Damian Peter, says the fund resonates with advisors who are trying to keep nervous clients in equities, and who have a head for insurance.

"Some recognize that there is cost for protection of these investible assets, like a whole-life policy or homeowner's insurance. They appreciate that there is a fund that generates the income to pay for this protection," says Peter.

So far, both Winchell and Peter are making the rounds introducing this product to advisors. They recently hired an internal wholesaler to assist in this process.  

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