Firetrail Absolute Return Fund Under Spotlight

  • Apr 07, 2019 AEST
  • Team Kalkine
Firetrail Absolute Return Fund Under Spotlight

Firetrail Absolute Return Fund (mFund code: FTR01) is an investment management boutique established recently in 2018. This mFund aims to deliver above the RBA Cash Rate over the medium to long term and targets to generate positive returns in all market environments.

What is mFund?

The Australian Stock Exchange (ASX) has introduced mFund which is a new and innovative way for the retail investors to access the unlisted managed funds. It is way faster and convenient to diversify the portfolio than what it used to be in a traditional way. It works like a mutual fund as in one can buy, sell, and hold units in unlisted managed funds through electronic access to the exchange. It works through the ASX’s CHESS platform which provides greater transparency of ASX holdings.

Coming back to Firetrail Absolute Return Fund, James Miller and Patrick Hodgens are the portfolio managers having their own investment strategy. The investment staff and the team are also invested in the fund alongside the clients.

The fund is comprised of both long and the short positions in ASX listed securities and uses a net market neutral strategy. In this strategy, the net market exposure of the fund generally stays between 0 – 10% which means the return is not dependent on the market performance. This market neutrality is achieved by investing in a combination of long and short positions. The fund’s exposure to long positions would be approximately equal to the fund's exposure to short positions.

To find the mispriced securities the fund uses fundamental, bottom-up approach which leads to a position of almost 30 to 40 long positions and 20 to 30 short positions, all fundamentally driven. It may also invest in up to 70 to 80 risky short positions which may not be fundamentally driven.

Interestingly Derivatives is also being used by the fund for the risk management purpose, to take opportunities, to increase returns, and to hedge the overall exposure of the fund. It may use both the markets, exchange-traded market, and over the counter market to participate in futures, options, forwards, swaps, participatory notes and even commodities. This also means that the fund would also be leveraged for the short selling and the use of derivatives.

Derivatives are primarily used for hedging purpose and to create a short position which reduces the fund’s net exposure. In accordance with the changing market conditions, the use of leverage may vary from time to time.  However, the fund caps its value of derivatives to a maximum of 200% of the NAV of the Fund. While the use of leverage in derivatives increases the potential return, it also increases the level of risk and may lead to substantial losses.

Performance of the fund

Since its inception in 14th March 2018, the fund has delivered a negative return of 2.74% (after fees) whereas the benchmark RBA cash rate has delivered 1.5%. This means the fund has underperformed its benchmark by 4.24%. However, in the last 3 months, the fund has outperformed its benchmark by 0.05% while delivering a 0.42% return compared to the RBA cash rate of 0.37%

Overall the net market neutral strategy of the fund makes it relatively safer and resistant towards the underlying market performance, but excessive use of leverage and derivatives also increases the risk factor. The investors must read the fund prospect carefully before investing.


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