Post Bernie Madoff and the collapse of global markets, investors have been wary of how to invest in the market. Many are worried about ponzi schemes, lack of performance, and the ability to protect their investments in the case of another down market.
Recently spoke funds have begun to emerge as investors look for alternatives to mutual funds and hedge funds. Like mutual funds, they give investors instant diversification. However spoke funds are not limited to a single strategy (such a growth or value) and have the ability to move into safe haven investments (such as cash or bonds) during times of uncertainty in the stock market.
While most portfolio managers do not invest in their own mutual fund, they do in both hedge funds and spoke funds. Investors typically prefer this approach as they feel the portfolio manager will have his best interests at heart when managing the portfolio. A key distinction between the two is how the money is invested. In both mutual funds and hedge funds, investors monies are pooled together in a lump sum. Why is this bad? The actions of a few investors can effect the performance of other investors.
Typically at the bottom of a stock market cycle, investors want portfolio managers to look for value and opportunity as the market recovers. However, this is not always the case. Behavioral finance has shown us that investors typically panic at the bottom of market cycles. Instead of looking for opportunity, portfolio managers are typically using any cash in the portfolio to pay out to investors leaving the fund. The investors who remain, don’t get the expected performance when markets begin to rise.
In a spoke fund, each investors account is separate, but instead linked together. When the portfolio manager purchases a security, the same security is bought in all the accounts at the same time. When an investor leaves the spoke fund, only his account is liquidated, having no impact on other investors within the fund.
This concept provides investors better transparency, avoids problems inherent with pooled money, and gives a portfolio manager a better opportunity to navigate volatile markets.
Investors who are looking to invest in either a mutual fund or hedge fund should give spoke funds a look.