Devoted to understanding the basics and fundamentals of investing

There is a risk that any manager on a performance-based schedule would take higher risks in order to earn higher fees. It is a standard risk that many (all?) hedge funds describe to their investors...and it is a risk that is disclosed in the prospectus for the TFS Small Cap Fund.

However, unlike hedge funds, the TFS Small Cap prices daily. This helps investors to monitor its price movements closely and calculate such things as beta, volatility, and other measurements that are designed to quantify risks.

Plus, investors can check out the fund's portfolio. The number of positions, % of assets in the top holdings, diversity across market caps, and other information that is readily available can help to estimate the risk.

The site below provides some of this information. It also comapres the returns of the fund to the Russell 2000.
http://www.tfscapital.com/mutual_funds/small_cap.asp

Rich, thanks for the clarification and amplification of ways investors can monitor risks in your fund.

Let my readers know how things work out and if you start anything new. We are always looking to educate and shed light on the investment process.

Larry

Notwithstanding the clarification and amplification to your above posting, relative to the correlation between higher fund performance and increased risk, I have a real problem with the concept of justifiable reward which you describe as payable to the fund manager:
"Both funds get paid for relative performance, not absolute. So if their benchmarks fail, as long as the two funds FAIL LESS, the managers STILL get paid."

Nuts! If you take a dollar bill out of your wallet right now and lock it up in your desk drawer for a year (or longer), at the end of your "performance evaluation period," you will still have an entire dollar safekept there. (Forget about the concept of uninvested assets becoming wasting assets in an inflationary economy, for the purpose of this example). The idea that a couple of fund managers would "only lose" say, 25 or 30 cents of that same dollar, if you entrusted it to their care (rather than to the safety of your locked desk) after a year (or so), and then have the temerity to expect a reward for such a dismal performance, makes absolutely no sense to me whatsoever. It would appear to be the height of mental masturbation to try convincing your clients you earned a cookie from them, when you actually spilled their milk instead. I don't buy it. Sounds like something a lawyer would argue...

Bob, it may be nuts but it is standard industry practice. I don't know of any money managers that don't charge for relative performance, and most (read mutual funds) charge regardless of their performance - relative or absolute.

Charging only for relative outperformance is a step up from most funds out there.

Well, it may be standard industry practice, but I still don't think that necessarily makes it right (or equitable). And that may be part of what's wrong with the business practices, principles of integrity, and ethical standards, which are so mysteriously deficient or compromised, among so many so-called professionals on Wall Street these days. If I screwed up, making recommendations to those clients of mine who asked me, then I expected them to (1) not ask me for my recommendations anymore, at best, and (2) for them not to bother calling me with further business opportunities anymore either, and for me to consequently get fired by my employer PDQ, at worst. I didn't expect to get rewarded for screwing up, and that expectation wasn't standard industry practice by management, when it came time for them to pay out year-end bonuses either, on my side of the phone.

This may be merely a question of semantics (although I seriously doubt it's that simple), but it sure seems to me you've got to start from some baseline, somewhere, and the baseline should be no worse than ZERO, NADA, NO PERFORMANCE, instead of somewhere down there on the negative side of the red scale, slipping away from reality. I would be so embarrassed and mortified, charging a valued client who entrusted me with his confidence and business, for losing LESS of his money than he might have OTHERWISE lost, if he had put it all on RED and EVEN at one spin of the roulette wheel in Las Vegas, I would just want to quickly dig a grave for myself and quietly crawl into it! While I agree with you that part of the job description in "the biz" includes working to minimize any losses (since they are unavoidable over time), I certainly wouldn't have the unmitigated gall to brag about how I lost my client LESS than some other moron might have, who happened to work for my competitor down the street!

Whether it's relative or absolute, it STILL should be some degree of real PERFORMANCE (and by that, I mean positive performance, not negative performance) which merits your earning an extra day from your boss, during which you are allowed to continue sitting at your desk and draw a paycheck. Believe me, in the investment banking business, you don't keep your job very long if the best you can do is put in negative performance. I bet that investment advisors and portfolio managers don't keep their clients or jobs very long either, if the best they can do is only screw up a little bit, once in a while (versus screwing up a whole lot, all the time). Hello, am I missing something here?

Bob,

If you want absolute performance over relatively short periods of time, long-only small cap mutual funds may not be a good fit for you.

You might have better luck with long-short, market neutral, hedged, or other types of investments. I believe some financial planners specialize in these types of investments and may be of value.

Rich

Rich,

I value your opinion, and thank you for your suggestion. It's a very thoughtful and a very good one, to which I shall give serious consideration, especially as it relates to "other types of investments," specialized in by a good financial planner.

Actually, I don't care if the performance is absolute or relative, short-term or long-term, small cap or large cap, long positions or shorted, market neutral or weighted, hedged or unhedged, as long as that performance is positive and not negative.

Best regards,
--Bob

Bob,

Happy to help!

Best,
Rich