The ACM Residential Real Estate Fund (REF) is designed to provide investors with exclusive exposure to the U.S. residential real estate market. Investors in the REF Fund have investment exposure to mortgage-backed securities, residential homes, rental homes, apartments, student housing, and manufactured homes across the U.S. The REF Fund is structured as a hedge-fund-of-funds portfolio. The underlying investment options include actively managed mutual funds, passively managed exchange-traded funds, REITs, and individual home builder stocks. The 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 REF Fund uses a tactical asset allocation overlay to periodically re-balance the portfolio in order to provide investors with optimal investment performance.
The REF Fund employs a portfolio insurance strategy that uses a dynamic hedging process in order to limit downside risk while allowing participation on the upside over a given investment time horizon. The total value of the REF Fund rises when the prices of the underlying securities rise and falls when the prices of the underlying securities fall. The REF Fund has unlimited profit potential because the prices of the underlying securities can rise into perpetuity. Portfolio investment risk is 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. Although the value of the underlying securities and the value of the long put option positions change in different directions, the REF Fund maintains a positive delta position. This phenomenon is due to the fact that while the negative delta position that is associated with the long put option strategy reduces the sensitivity of the REF Fund to changes in the underlying securities prices, the net delta position is always positive.
ACM 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 REF Fund, ACM implements an Ex-post portfolio insurance strategy to protect previously purchased fixed income securities against prepayment risk and extension risk. The REF Fund does not use put options to protect the fixed income segment of the REF Fund against default risk because the underlying mortgage backed securities are backed by an explicit- or quasi-U.S. government guarantee. The REF Fund is not fully hedged against all potential market losses because put options may not be available for some of the underlying securities. The cost to completely hedge the REF Fund also negates the ability to generate an acceptable level of alpha for investors. When the tactical asset allocation is fully implemented, the portfolio insurance strategy should cap investment losses at 10% in an economical, efficient, and effective manner.
ACM routinely conducts a copious level of qualitative and quantitative due diligence on every security in the ACM 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 that would enhance the risk-return profile of the REF Fund need to be made. This level of due diligence ensures that security turnover, trading costs, and taxes within the REF Fund will be minimized. Overall, the strategic asset allocation, tactical asset allocation, fund-of-funds investment structure, quality of underlying investment options, and dynamic portfolio insurance strategy should generate the level of risk-controlled investment performance that investors in the REF Fund expect to receive over a mutually acceptable investment time horizon.
Investors with less than $50 million USD can establish an account with the brokerage firm of their choice and grant ACM the authority to purchase and sell securities in a manner that will replicate the investment structure and performance of the REF Fund. Under such an arrangement, the investor will have the sole authority to make deposits and withdrawals into and out of the account, the brokerage firm will provide all back-office services such as record keeping, compliance, and IRS reporting, and ACM will have the sole authority to make all investment decisions. For investors with more than $50 million USD, ACM will establish a separate account held in trust with an independent third party on behalf of the investor and manage all investment, front office, and back office responsibilities.
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