Manager Weds Long-Only, Hedge Overlay Strats

Mar 2 2007 | 11:42am ET

Retail asset management firm Watauga Equity Management is looking to get in on the institutional game with a new strategy that combines a long-only strategy with a hedging overlay.

David Rogers, founder of the firm, which currently employs both long and short strategies, is shopping his “convergence fund” model to prospective seed investors and incubators. He is also speaking with a limited number of long-only hedge fund managers that are looking to add significant alpha and reduce adverse asset volatility.

According to Rogers, his convergence model marries the traditional long-only approach with Watauga’s proprietary studies, and establishes the probability of future overall market direction with approximately 83% accuracy. His fund would utilize exchange-traded funds to “neutralize” the prospective impact of overall market declines on the long portfolio.

Rogers said his model is highly scalable, “up to roughly $10 billion,” making it appealing to pension, retirement system and insurance company investors.

“What we are doing is taking everything that the institutions have already bought into— traditional buy-and-hold strategies—and making them better,” says Rogers.

Rogers says that the only risk that the model adds is potential opportunity cost. For example, when the fund puts on the ETF short position, or buys inverse ETFs, it cuts off all or some of the upside of the long portfolio if the overall market keeps going up.

“But when you are mostly right about market direction, that occasional opportunity cost is inexpensive compared to the longer-term alpha you add. In our mutual fund asset allocation services last year, we were up 42% after fees–and in 100% money market for more than a third of the year.”

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