Indianapolis-based hedge funds subject to market forces, too

Back to TopCommentsE-mailPrintBookmark and Share

Before the market crash, they were the wunderkinds of the investment world, often heralded for achieving double-digit returns for their wealthy clients.

Hedge fund managers profess to provide investors a hedge against a poor-performing market—a way to dampen market volatility. They often use alternative investments such as commodities or selling stock index futures over varying periods of time that provide returns uncorrelated with the stock market.

Instead, many of the nation’s hotshot investment managers chased high returns, bringing double-digit losses at giants such as Cerberus Capital and Citadel Investments.

hedge“As to their ability to insulate people against crashes, I would guess the investment community doesn’t see them as much as masters of the universe” anymore, said Charles Trzcinka, a finance professor at the Indiana University Kelley School of Business.

Five years after the crash, the luster of hedge funds isn’t what it used to be—witness a near-20-percent year-to-date rise in the Standard & Poor’s 500 index compared with the HFRI Fund of Funds Composite Index, up about 8 percent.

“To this day, hedge funds have struggled and haven’t been able to keep up with the market,” said J.R. Sauder, a partner in Indianapolis-based hedge fund Two Fish Management.

But he and firm partner Mike Morris are quick to qualify that the returns are raw. They don’t reflect the value over time of hedge funds to outperform during market downturns.

Since inception, in 2009, Two Fish’s annualized returns have been nearly 6 percent higher than the S&P 500 index: 27.1 percent vs. the S&P’s 21.3-percent rise.

“Since our strategy is significantly less volatile and uncorrelated to the market, our risk-adjusted returns are very high,” Sauder added.

Yet hedge funds remain a mystery to many and, unfortunately, one local fund wasn’t known for good things. Former Fishers hedge fund manager Keenan Hauke invested millions of dollars in Michigan real estate that became nearly worthless.

The bigger problem was that he covered up the losses by creating fake account statements and used money from new investors to pay off earlier ones. Dozens of investors lost more than $7 million. In 2012, Hauke was sentenced to 10 years in federal prison.

Other than Hauke, the few hedge funds based locally are mostly obscure. One reason is that their clients are often wealthy individuals, financial firms or retirement funds. The Indiana Public Retirement System has $1.9 billion in hedge funds, about 8.5 percent of its assets.

In April, the $27.1 billion fund announced $365 million in investments with hedge firms, eyeing expected long-term returns of 4.9 percent.

An individual investor’s net worth must exceed $1 million at the time of purchase, excluding the value of his residence. The threshold can be lower when factoring in a working spouse’s income.

Hedge fund investors also have to be prepared to leave their money in the fund for a while, as they’re generally more illiquid—sometimes locking in a client for at least two years.

An investor also will a pay a management fee, generally 1 percent to 2 percent of assets managed. Some also charge an incentive fee, based on 10 percent to 20 percent of fund profits—assuming the fund is profitable and exceeds a previous high known as a high-water mark.

Another aspect of hedge funds is that managers usually have a big portion of their own money on the line. In theory, “that concentrates your mind,” Trzcinka said. “They are not caretakers. They are actually active investors.”

“I have significant skin in the game in that a majority of my family’s investable assets are in the fund and invested along with partners,” said Ryan Fuhrmann, who runs Carmel hedge firm Fuhrmann Capital.

Lots of flavors

Aside from some of the basic characteristics, one hedge fund can be radically different from another in its investment focus. Two Fish, for instance, makes much of its money by selling out-of-the-money put options.

Sauder is a former business valuation analyst at local accounting firm Katz Sapper & Miller, and Morris is former director of investment research at KSM Capital.

Since founding the firm six years ago, the duo has $250 million of funds under management. They’ve also been making a name for themselves outside of Indiana.

Earlier this year, Morris found himself on Canada’s CBC television network and in Toronto’s Globe and Mail newspaper after his research suggesting a way to turn around one of the worst-performing mining groups, Toronto-based Barrick Gold.

Two Fish also wound up in Barron’s for its contention that Barrick should sell or spin off its business units outside of the Americas.

“We spend a lot of time on boring businesses,” Sauder said of some of the stocks.

Meanwhile, at Fuhrmann Capital, Furhrmann is using his analytical acumen to invest in primarily large-cap stocks on behalf of individuals. He also has interest in two smaller private institutions, including the National Bank of Indianapolis.

“I don’t do anything with futures or commodities and don’t really plan to,” said Fuhrmann, also an adjunct professor at Butler University. “I am better at predicting how a well-run business performs over a three- to five-year cycle, or entire business cycle.”

His holdings generally consist of stocks with a solid track record and good management, including Caterpillar, Deere and MetLife. Since founding the firm in 2007, Fuhrmann’s holdings have returned 2.45 percent above the S&P 500 index, net of investment management fees.

“I am for a stock that doubles over five years, which works out roughly to a 20-percent annual return,” Fuhrmann said.

“This obviously didn’t happen during the height of the financial crisis, but we have been pleased with our results since.”•


Post a comment to this story

We reserve the right to remove any post that we feel is obscene, profane, vulgar, racist, sexually explicit, abusive, or hateful.
You are legally responsible for what you post and your anonymity is not guaranteed.
Posts that insult, defame, threaten, harass or abuse other readers or people mentioned in IBJ editorial content are also subject to removal. Please respect the privacy of individuals and refrain from posting personal information.
No solicitations, spamming or advertisements are allowed. Readers may post links to other informational websites that are relevant to the topic at hand, but please do not link to objectionable material.
We may remove messages that are unrelated to the topic, encourage illegal activity, use all capital letters or are unreadable.

Messages that are flagged by readers as objectionable will be reviewed and may or may not be removed. Please do not flag a post simply because you disagree with it.

Sponsored by

facebook - twitter on Facebook & Twitter

Follow on TwitterFollow IBJ on Facebook:
Follow on TwitterFollow IBJ's Tweets on these topics:
Subscribe to IBJ
  1. Good Day I am Mr (Victoria Wright) from United state of America, i stayed in NEW YORK, and i have a broke up business, until i found this company email who help me to gain a loan for business,, and now i want to used this short medium to congratulate the below company for the fast and safe money they loan to me without any form of collateral, i loan 500,000USD from the company to save my business and lots more, i saw their mail on the internet, everyone always give testimony for what they did, so i quickly contacted them and they all did everything for me without stress and my money was sent to my account just 3 days later, i was surprise and i feel so glad, now i have a standard business control agent who help me, now i will advice those who need urgent loan to contact him at the bellow email:zenithfirm12@gmail.com

  2. NOTICE:This is to inform the general public that Vampires are real. My name is James Franklyn.,am an agent of vampire,am here to introduce our new world trend to you,a world of vampire where life get easier,we have made so many persons vampires and have turned them rich,you will be assured long life and prosperity,you shall be made to be very sensitive to mental alertness,stronger and also very fast,you will not be restricted to walking at night only even at the very middle of broad day light you will be made to walk.In case you are wildly oppressed by some unscrupulous persons we can still help you fight them.Your protection is assured immediately you join.Just contact the bellow email if you are interested we are here to attend to you anytime you want us. Contact the bellow email for more details. Email:vampirescreed@hotmail.com Sincerely: James Franklyn.

  3. Bravo! Someone else that is willing to speak the truth! Bravo!_____NBCSN is available in almost 2 MILLION more homes than just a few years ago, but Indycar STILL gets less total viewers than it did just a few years ago when NBC took over Versus. Attendance and ratings cratered with the end of season races (just when the title battle got "interesting" HAH!__________And now...new race in Basilia, where Miles celebrated the "rich history" of Indycar racing there. Rich history? What, 7 events in the 100 years of AOW? Yep, some history. Well, at least its an oval. It's not??? Are you kidding me??? Gosh darn road racin furriners.

  4. PURITY RAY LOAN OFFER........ Have you been denied by your banks,or are you in need of of an urgent loan to pay of your bills we are capable of giving loans @ cheaper rate to interested individuals, student, companies and members of the public in need of finance to settle bills, we do offer considerable loans which you can count on. For more information on our various types of loan,then you will have to contact PURITY RAY LOAN FIRM, to help you achieve your desire LOAN APPLICATION FORM TO BE FILLED BORROWERS INFORMATION * Full name:………………………. * SEX * ……………………………. * Country………………………….. * State:……………………………. * Land:…………………………….. * Occupation:…………………….. * phone number:…………………. * Telephone: ………………………….. * Age:………………………………. * Amount needed as loan:……… * Loan Duration:………………….. * Propose of Loan:……………….. * Annual revenue:………………… * Monthly Income:……………….. * Guarantee:………………………. * Payment: monthly or annually Email.....purityrayloanfirm@gmail.com Thank you and God bless Mr Purity Ray PURITY RAY LOAN FIRM we tend to serve you better

  5. Problem: most of the people responding to this article don't know about this service AT ALL! Why? Lack of awareness. This isn't IndyGo. This is CIRTA: might as well be the mattress company because they are asleep at the wheel - something like 3 directors over the last year? Playing with federal grant money is great! This "region" wants commuter rail service, has spent MILLIONS on Transportation studies yet can't even support a commuter bus line? This is largely for suburban riders to get to downtown - not for "service people to work in our hotels and restaurants" ! Get your head out of your backside!! These are professionals, students etc. that don't want to fight traffic, save some money on parking, gas, stress.... if CIRTA would put their federal money into widely promoting the sevive to Greenwood, Fishers & Carmel instead of finding directors and studies - this would be a successful service. Our family uses(d) it daily for the last several years - but the recent uncertainty & now unreliability due to cuts from Carmel has been a problem. Now, costs us an additional $350/month for gas & parking ( $4200/year) plus vehicle wear, service, environmental impact ... YES - this REGION needs this this type of service in order to keep growing and getting the people it needs to fill skilled positions in downtown Indianapolis. Think outside of your own car !!!