SuperFund Review – Are the Returns Too “Super” to be True?

After a barrage of commercial television advertisements, I decided to check out what the SuperFund was all about.  Upon seeing the commercial, the name SuperFund jogged some memories of a prior article I read and bam!, it hit me.  I had read about it in this BusinessWeek article years ago.  Perhaps the mental affiliation with a toxic waste site triggered the memory. The commercial just features a European guy walking around mispronouncing “investment”.  While the US commercial lacks appeal – it’s quite annoying actually, I envision this is some kind of coy curiosity ploy that will evolve into more descriptive, quantitative result-laden commercials.   The 2006 BusinessWeek article raises some questions and concerns over real returns for investors, and highlights that this managed futures fund is pitched as the Everyday Guy’s hedge fund due to the modest income requirements and minimum investment limits.  SuperFund is not a scam; to their credit, investors willing to read the prospectus will see what they’re up against though.

Since the article is a bit dated and focuses primarily on the European investment cohort, I went right to the source and can report the following based on Fact Sheets and Prospectus:

• On the home page, Superfund A and B claim annualized returns of 11.3% and 16.9%, respectively.  They also claim cumulative returns of 95.2% and 165%.  Oddly, there is no date of inception provided.  Why?  I don’t know.  The date in the fact sheet for A and B shares was listed as 2002; I’m unsure of why this would be omitted on the home page.
• A description of the investment model yields the following: Managed futures investments are intended to generate long-term capital growth and provide global portfolio diversification. A primary reason to invest in a managed futures product, such as Quadriga Superfund, is to provide a non-correlated investment to a portfolio of traditional stock and bond investments that has the potential to improve returns and lower the portfolio’s volatility. This is possible because managed futures products historically have not been correlated to traditional markets, such as stocks and bonds.
• The Fact Sheets show very impressive returns and no correlation with the major equities indices.  Attached is a screen shot of the returns that look nothing like the returns on equities in the past few years:

Looks pretty good, right?

Now, Reality Sets In

These disclaimers are displayed on the Fact Sheets in plain view, but should be seriously considered by prospective investors:

An investment in Series A or B involves substantial risk and may result in the complete loss of principal invested.

The foregoing performance results are shown net of all fees

Each series is speculative and is leveraged from time to time.  As a result of leveraging a small movement in the price of a contract can cause major losses.

There is no secondary market for the investment offering and redemptions are only limited to certain periods.
Substantial expenses must be offset by trading profits and interest income for each series to be profitable.

Prospectus – Details, Details, Details…

• Investment eligibility requires net worth of at least $70K and $70K annual income, which is much more affordable than the typical $2Million/$200K for hedge fund investors.
• There is a note on counterparty risk, which is essentially what led holders of credit default swaps to financial ruin during this most recent crisis.
• 1.85% Management Fee – reasonable, right?  But, then there’s the 25% of aggregate cumulative net appreciation - That’s a huge chunk!
• There’s a note on Selling Agents and Affiliates, which reads as though you’re essentially paying a 4% load and 4% per year after.
• There is some ambiguity as to tax treatment, which could put this investment at a further deficit to more conventional alternatives.

To their credit (or perhaps that of the regulators), there is a clear break-even scenario laid out, which I was going to try and calculate myself.

You need to return 8.75% in A shares and 10.63% in B shares to just Break Even!

In light of these exorbitant fees, the returns that seemed so attractive initially are not so alluring at the end of the day.  Is it possible that even with these risks and fees, it’s still a net benefit for regular investors over traditional investments?  Or will the “SuperFund” connotation as Americans know it be fitting?

Related posts:

1. 2009 Global Stock Market Returns – Every Country ETF Ranked
2. 2009 Stock Market Returns YTD from Around the World – Shocking!
3. The Truth About Rewards Credit Cards – But, Is it Really True?
4. Hedge Fund ETF – Will the Performance Live up to the Hype?

Tagged as: Criticism, Managed Futures, Quadriga, Stocks, Superfund