Patton Periodical Newsletter - October 2007 If email client has problems, Click Here
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Performance Summary – September 2007
The performance of the Patton Edge Plus Fund was strong in September producing a net return of 6.4%. During the same period the HFRX Equity Hedge gained 0.6% and the S&P 500 was higher by 3.7%. All of the stars aligned for our Fund in September with both the long and short positions producing profits with the majority of the profits on the long side. The “Winners” table lists some long positions that were among the biggest contributors to the month’s profits. Again, in spite of the overall market’s strong performance during the month, several short positions also contributed to our Fund’s September profit including some of those in the table. And even during a very good month there are still plenty of individual holdings producing losses. A few of the biggest losses came from the short positions listed in the “Losers” table.
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Year-to-date the Patton Edge Plus continues to outpace both the HFRX Equity Hedge and S&P 500 by a wide margin. Helping the Fund has been a weakening in small-cap performance relative to large-cap with the Russell 2000, a small-cap benchmarket, up just 2.5% for the year while the large-cap S&P 500 has gained 8.7%. This is a cycle that had been working against the performance of the Fund since inception through the early part of this year, with small-cap performing better than large-cap, but appears to have shifted in our favor. The impact of such a shift could be extremely positive for the long-term performance of the Fund as I discussed in the March 2007 Video. |
| Understanding Behavioral Finance |
| The investment disciplines of the Fund are all built on principles of behavioral finance, the academic study of investors’ decision making process. Generally speaking, behavioral finance says that investors do NOT always act rationally when making decisions and sometimes simply get confused, again resulting in what seems to be an irrational decision. This school of thought is very different from mainstream economics that ASSUMES investors always make rational decisions. |
| One behavioral principle is called Loss Aversion. The concept of loss aversion is that investors tend to strongly prefer avoiding losses than acquiring gains. Some studies suggest that losses are as much as twice as psychologically powerful as gains. For investors, this suggests that a 10% loss has the same psychological impact as a 20% gain. |
| The impact of loss aversion has a very powerful impact on most investors’ decision making. For example, this can lead to the selling of winning stocks and booking a profit while at the same time holding on to losing stock positions and not accepting the reality of the loss. This type of decision making has been proven to lead to poor investment results. |
| “Did you know?”…why is a bull market called a bull market and a bear market called a bear market. It’s because bulls strike up and bears strike down. |
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The challenges resulting from our human tendency loss aversion was considered and addressed when developing the investment disciplines of the Fund. The discipline for selling long positions specifically addresses this and was designed to let the winning stocks remaining in the Fund while at the same time identifying and selling the losing positions. This investment discipline is implemented without emotion in the Fund and addresses head on our human tendency of loss aversion. |
| Hedge Fund Industry Headlines |
| Yale Endowment reports a 28% return for the year ending June 2007 compared to the average university endowment’s 17.5% return. Its 20-year compounded return has been 15.6% compared to 10.2% for the average endowment. This success has been partially attributed to the Yale Endowment’s wide use of alternative investments including a 23.3% allocation to hedge funds at its 2006 fiscal year-end. Source: Wall Street Journal, September 27, 2007; Page C3. |
Goldman Sachs Global Alpha Fund is down 33.4% in 2007. This year’s loss through August is in addition to a 9% loss in 2006. The Global Alpha Fund has been considered Goldman’s flagship fund with assets of about $10 billion last year. In a letter to its investors, the fund managers referred to the widespread dislocation across capital markets in recent weeks as part of the problem. Goldman vowed to do better with the fund by constraining its borrowing. Source: Wall Street Journal, 10/19/07; Page C8. |
Hedge fund managers’ average pay reported at $657.5 million. Yes, that is not a typo! The article in InvestmentNews on 8/29 and reported elsewhere in the press, failed to report a source for this figure. A study conducted by Alpha magazine of the top 25 fund earnings in 2006 reported the average of the top 25 at $570 million in 2006. We have to assume that the other 10,000 or so hedge fund managers would bring this average down significantly! Source: CNNMoney.com, 4/24/07. |
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| www.PattonFunds.com Highlighted Feature |
| Our website has been greatly enhanced in recent weeks. Included in the upgrades has been the ability to report preliminary monthly performance results for the Fund by the second or third trading day of the following month. This can be accessed from the “Investor Quick Links” then clicking “Performance Results” on the left of the Fund’s main page or by clicking here. |
Please visit your website often to remain involved with our updates: www.pattonfunds.com
Mark Patton
President
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