Over the past year, Nandu Narayanan, founder and chief investment officer at New York-based Trident Investment Management LLC, has generated a return of almost 100% for accredited Canadian investors in Trident Global Opportunities Fund.
Now Trident and fund sponsor CI Investments Inc. <\/b> of Toronto have launched a closed-end offering \u2014 Trident Performance Corp. \u2014 that will be available to those who aren\u2019t accredited investors. It will be managed in the same fashion as the $103-million Trident Global Opportunities Fund.
Narayanan says that in the coming months, there will be much more of the same economic turbulence that has already hammered global markets. This weakness contributed significantly to the Trident fund\u2019s hefty performance in 2007.
\u201cThe market is entering a very difficult phase. The real estate crisis in the U.S. is hardly over. And the credit crisis is warming up in a big way,\u201d he says. \u201cWe aren\u2019t done \u2014 we haven\u2019t seen the rash of potential bankruptcies and the [start] of the cleaning up of the mess.\u201d
Until last year, performance of the fund, launched in February 2001, wasn\u2019t exactly of the heart-pounding variety. It posted returns of 0.1%, 5.7% and 1.1% in calendar 2006, 2005 and 2004, respectively. The 2007 jump was the result of the fund\u2019s strategy paying off.
Trident expected an economic correction to start in 2006. \u201cWe felt it was madness that investors were piling into the credit instruments as if there was no tomorrow,\u201d Narayanan says. \u201cIn our view, the potential upside was very limited but the potential downside was huge.\u201d
As a result, the fund sold many of its holdings short, including real estate firms and the U.S. dollar. As of the end of Nov. 30, 2007, 32% of fund\u2019s equity portfolio was sold short.
\u201cThe longer the blundering goes on, the more opportunities we expect for profit,\u201d Trident says.
The new fund\u2019s objective is \u201cto provide tax-efficient risk-adjusted long-term rates of return by obtaining exposure to the global macroeconomic portfolio,\u201d according to its preliminary prospectus, which also says the portfolio may consist of equities, fixed-income, commodities, currencies and derivative instruments. With the markets posting large negative returns in the first part of the year, the fund hopes to protect investors on the downside through selling short and let them share in the upside by writing uncovered call options.
Trident, which specializes in alternative investments, believes its money managers can exploit global trends to generate returns with low or negative correlation to global equity markets. Some of the trends include:
> Real Estate And Credit Deterioration. <\/b> Although there have been significant losses to date, a Trident report says, \u201cThe losses so far declared by these financial institutions are a small percentage of their true losses. These losses are being compounded by a concurrently downturn in the U.S. housing market.\u201d
> U.S. Economic Slowdown. <\/b> Trident is negative on the U.S. economy. At best, it has entered a period of prolonged economic slowdown and, at worst, a major recession.
> Global Inflationary Trends. <\/b> A combination of currency-pegging by major Asian economies, large Asian investment booms and lower U.S. interest rates should translate into higher inflation, especially for commodities. In that scenario, Trident funds will invest in gold and gold equity securities and take short positions in the US$ and long positions in the Japanese yen and Japanese equities.
Retail investors need a minimum of $2,000 to get a seat at the table. Each $10 unit in the new fund consists of one share plus one warrant, which runs for three years and allows the holder to purchase another share for $10.25. The fund runs for 10 years and, unlike most closed-end funds, doesn\u2019t plan to pay regular distributions along the way. It has A- and F-class shares.
The new offering comes with lots of fees: there is the standard 5.25% underwriting fee and the regular 25\u00a2 fee paid when a warrant is exercised. There is a fee of 0.25% of net asset value paid to the manager, while CI Investments will receive an annual management fee of 1.10%.
As well, there is an annual performance fee of 20% and a service fee of 40 basis points paid to the advisors. There is also a dealer performance fee \u2014 the manager will pay to the brokers a special fee set at 10% of the performance fee or a maximum of 2% of any gain. \tIE<\/b>
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