Thursday, 26 March 2015
Last updated 1 hour ago
Dec 18 2013 | 7:51am ET
Ralph Doudera has both financial management and Bible studies in his educational background, which may help explain his decision to donate the sub-advisory fees from his liquid alternative mutual fund to charity. That fund, the Hundredfold Select Alternative Fund, which invests in both high-yield bonds and alternative strategies, boast $140 million in assets. FINalternatives senior reporter Mary Campbell spoke recently to Doudera about the fund and his Simply Distribute charity.
Tell me about your background.
I have a masters in finance and management from the New Jersey Institute Of Technology, and then I got my masters in biblical studies at Regent University.
I have always been involved in investments. In college, I invested my student loan money in over-the-counter stocks. My senior year, I cashed it in and I bought myself a new 427 Corvette coupe, which is what money is supposed to be used for. I wish I still had that car because I could probably retire on its value.
After that, I worked in for Procter & Gamble and then decided to get into financial planning. I worked as an executive for the CIGNA Insurance Co., doing estate planning, which I eventually phased out of entirely to manage other people's money.
Tell me more about the Select Alternative Fund.
With Spectrum Financial’s really strong background in managing high-yield bonds, we decided to donate our experience to Hundredfold Advisors to use some of those strategies in the Alternative Fund. So Hundredfold Advisors developed a fund that uses a combination of high-yield bond strategies, which we like because they are so consistent, and some other investments that are not directly related to the stock market. We came up with a formula for this particular fund of about 60% high-yield and 40% in alternatives. Since these are really low-risk strategies, we felt like an element of leverage would be appropriate from time to time. So we decided to make our numbers about 80% high-yield strategies and 50% alternative strategies to bring us to about 130% invested when things are going well, when we've got the wind at our backs.
What does the high-yield portion of the fund look like?
The high-yield portfolio is broken down into three different trading strategies; we've got one that is an in-or-out strategy and two others that use different trading models. We don't buy individual bonds but we do use other managers' mutual funds, which we don't trade a lot. We have a core position in them and then we work around them. If we want to hedge them we can hedge them using short positions in some of the high-yield exchange-traded funds, or the CDX.
What alternative asset classes does the Select Alternative fund invest in?
We look at the open-end mutual funds that are doing something a little bit different. We're in one long/short fund that's got a good performance record. We've got one in a merger acquisitions fund, there's another managed futures fund, and then we complement that with some of our own trading strategies using some stocks.
Sometimes we'll take eclectic trades: We were short the yen for a little bit, we were long gold for a little bit, we were long some Chinese currency and that sort of thing. Not big positions—they are never going to take a big hit because it's so diversified and the portfolio is so liquid. In fact, it's liquid enough that we can get out of our entire portfolio in one day. It's my "sleep good at night" fund because you never know when a dirty bomb is going to go off somewhere, and you just never know when the government is going to shut down, but you can get out quickly.
What is the advantage to investing in "other people's mutual funds" and ETFs rather than buying individual bonds?
Liquidity. Basically, we don't want to be the best bond managers or the best stock pickers or the best alternative designers; we want to look for the best managers who are out there, monitor all the funds that are out there and get into them when they're doing well and get out of them if they're not. With individual issues, there are commissions, liquidity issues, you can't get out and again, when that time comes to get out we want to get out at the NAV, we don't want to pay a big discount to liquidate our holdings.
How many positions do you hold at any one time, and how long do you tend to hold them?
Some of the funds we are buying on a swap basis we normally would hold for six months. Some of our high-yield positions we will hold for several months as well. It really depends on the kind of markets we're having; some of our investments we can get in and out of quickly, without any concerns, so we will have a shorter timeframe on.
Last week, when the market sold off really hard, we had 0% allocated to equities. We got a short-term buy signal and we bought some Russell 2000 futures right at that low day, and we may only hold them for several days. It's not a big position, it's just 5%.
If the high-yields went into a sustained down trend and it looked like we were into a recession, we would not be in any high-yields at all—that part of the portfolio would be in a cash position just sitting there waiting for the opportunity to get back in. But the alternative side would still be working hard to generate some positive returns in a declining market.
What do you like right now, given current market conditions?
We've been heavily invested for the past few months floating rate funds, because they don't participate to any great extent in interest rate increases. A lot of people have asked, "With interest rates starting to go up, what do you invest in?" Well, you don't invest in long-term government securities for sure.
High-yield bonds are also a good instrument for taking a rising interest rate environment and making some money. Normally, when you have rising interest rates, you have credit upgrades, which means the economy's doing well, and as long as the economy's doing well it means the high-yield bonds that you're holding are going to get credit upgrades and they are going to go from a lower rating to a higher rating, which will be reflected in the price of the bond going up. You'll get that yield locked in and then you'll get the appreciation in the bond so you can still make some money in the high-yields.
Tell me about Simply Distribute, and your decision to donate your sub-advisory fees.
I got to the point in my life where I figured, I have enough, so what can I do for someone else? We decided to set up an advisory firm owned by a public charity and structure this mutual fund in such a way that all earned sub-advisory fees are donated to a public foundation. The charity gives the money away at the end of each year. We don't earn anything from this fund, we just pass it through Hundredfold Advisors and pay it out to a number of different charities.
It's kind of unusual. We had to wait a long time to get an IRS approval on how this thing was set up. It took five years. It was totally contrary to anything anyone had done before. In fact, they didn't even trust me. "Why would you want to do something like that?" But I'd just written a book called The Wealth Conundrum, which was about my struggles with wealth. I actually gave a copy of my book to the IRS guy so he saw that I was sincere in what I was trying to do.
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