The ACM Residential Real Estate Fund (REF) is a model portfolio that is designed to provide investors with exclusive exposure to the U.S. residential real estate market. Investors that utilize the model REF Fund portfolio design will have investment exposure to mortgage-backed securities, residential homes, rental homes, apartments, student housing, and manufactured homes across the U.S. The model REF Fund is structured as a hedge-fund-of-stocks-and-funds portfolio. The underlying investment options include actively managed mutual funds, passively managed exchange-traded funds, REITs, and individual home builder stocks. The model REF Fund has a tilted strategic asset allocation that sets forth a 60% position in equity securities and a 40% position in fixed income securities. The model REF Fund uses a tactical asset allocation overlay that facilitates the periodic re-balancing of the portfolio in order to provide investors with optimal risk-adjusted investment performance.
The model REF Fund periodically utilizes a portfolio insurance strategy that is based upon a dynamic hedging process in order to limit downside risk while allowing participation on the upside over a given investment time horizon. When the hedging strategy is utilized, the value of the model REF Fund’s underlying securities and the value of its long put option positions will change in different directions. However, the model REF Fund will always maintain a positive delta position. This quantitatively designed feature is due to the fact that while the portfolio will have a negative delta position when its long put option strategy is put into effect in order to reduce the sensitivity of the model REF Fund to changes in the fund’s underlying securities’ prices, the portfolio’s long positions in fixed income securities and equity securities will ensure that the portfolio’s net delta position is always positive. When the ACM hedging process is put into effect, the portfolio’s investment risk will be limited to an amount that is equal to the prices of the underlying securities minus the strike prices for the put options plus the put option prices plus commissions. Overall, the total value of the model REF Fund will rise when the prices of the portfolio’s underlying securities rise and fall when the prices of the portfolio’s underlying securities fall. As designed, the model REF Fund will always have unlimited profit potential because the prices of the portfolio’s underlying securities will always be able to rise into perpetuity.
As a hedge fund model portfolio investment manager, ACM periodically implements an Ex-ante portfolio insurance strategy to protect previously-purchased equity securities when the short-term forecast for the performance of the residential real estate market is bearish, but the long-term forecast sentiment remains bullish. Given the lag-time in the impact of macro-economic data on the performance of the fixed income segment of the model REF Fund, ACM periodically implements an Ex-post portfolio insurance strategy to protect previously purchased fixed income securities against prepayment risk and extension risk. The model REF Fund does not use put options to protect the fixed income segment of the portfolio against default risk because the underlying mortgage backed securities are backed by an explicit- or quasi-U.S. government guarantee. The model REF Fund is NEVER fully hedged against all potential market losses because the cost to completely hedge the portfolio negates the ability to generate an acceptable level of alpha for investors. Moreover, put options may not be available for some of the underlying securities that constitute the portfolio. Nevertheless, when the ACM hedging process is fully implemented, the ACM portfolio insurance strategy should cap investment losses at 10% in an efficient and effective, albeit expensive manner.
ACM routinely conducts a copious level of qualitative and quantitative due diligence on every security in the model REF Fund and periodically conducts a similar amount of research on the securities in its residential real estate universe in order to determine if any changes to the ACM model portfolio would enhance the risk-return profile of the model REF Fund. This level of due diligence ensures that security turnover, trading costs, and taxes within the model REF Fund will be optimized. Collectively, the strategic asset allocation, tactical asset allocation, fund-of-stocks-and-funds investment structure, quality of underlying investments, and dynamic portfolio insurance strategy should generate the level of risk-controlled investment performance that investors expect to receive over an acceptable investment time horizon.
As a thought leader and progressive hedge fund investment manager, the founder of Adkins Capital Management guarantees transparent operations; comprehensive investment exposure that is exclusive to the residential housing industry; fully disclosed investment guidelines, investment holdings, and investment performance; liquid investment holdings that do not mandate a lock-up period; prudent investment exposure to inexpensive mortgage-backed securities funds; inexpensive hedge fund investment management fees that will be assessed by a pre-paid annual client invoice; a rebate of the ACM hedge fund investment management fee if the performance of the ACM model REF Fund is less than zero for the calendar-year-ending period; clearly defined and controlled investment risks; and attractive investment performance.
Investors with more than $1 million USD can establish an account with the brokerage firm of their choice and grant ACM the authority to purchase and sell securities within the client account in a manner that will replicate the investment structure and performance of the ACM REF Fund model portfolio. Under such an arrangement, investors will have the sole authority to make deposits into and withdrawals out of their client account and their brokerage firm will provide all of the back-office services such as record-keeping, compliance, and IRS reporting. For investors with more than $50 million USD, ACM will establish a client-specific separately managed account that is held in a trust with an independent custodial banking institution of their choice. For these types of large client accounts, ACM will manage all investment, front office, and back office responsibilities. By using ACM’s independent third-party brokerage system or separately managed accounts program for residential real estate investing, investors can implement an economical, efficient, and effective residential real estate investment strategy that leverages Adkins Capital Management’s renowned residential real estate knowledge, robust security selection methodology, comprehensive investment monitoring process, and time-tested risk-controlled investment performance strategy.
How To Start Hedge Fund In The U.S. This article explains how to legally establish a hedge fund in the United States. This article was originally published by Investopedia on April 14, 2015 and was updated on February 22, 2021.