Calif. Firm Preps Long/Short ETF Hedge Fund

Apr 29 2008 | 2:00am ET

Hermosa Capital Management is prepping a long/short hedge fund to invest in a broad range of exchange-traded funds for launch this summer.

The firm, based in Hermosa Beach, Calif., will employ proprietary analysis and a fund ranking system to select from hundreds of worldwide and domestic ETFs for the Hermosa Capital Fund. It will invest in securities that trade in sufficient volume to allow for swift execution of transactions, and positions in securities may be held for very short periods—as brief as just a portion of a day—according to Christopher Harris, a consultant to the fund.

“We wanted to create something that was a disciplined strategy and kept risk in check or as much as you could in this marketplace,” said Harris, who has been involved in the equities space since 1997 as a market researcher and proprietary systems developer. “I traded individual equities and mutual funds so when ETFs hit the market, I was just excited. We’re at about 600 ETFs now, which is more than enough, and we’re seeing new funds from India and other country-specific ETFs, so we’re able to capture a lot of different markets at the drop of a dime.”

The strategy is currently using a proprietary ranking system based on relative strength, momentum and total return to rank some 300 ETFs, picking the top three to 10 to invest in. The strategy currently has exposure to the U.S., China and South Africa.

According to Investment Company Institute, which is the national association of American mutual funds, the number of ETFs has risen from one in 1993 with $464 million in assets under management to 613 ETFS with total AUM of $572 billion.

Harris said the emergence of ETFs within mutual funds’ portfolios will only benefit the firm’s strategy.

“The emergence of more ETFs will allow us to pick more sectors and to isolate those sectors and take advantage of the volatility within those sectors,” he said.
The fund will charge a 2% management fee and a 25% incentive fee with a $250,000 minimum investment requirement.

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