Alternative mutual funds are often billed as packaging “hedge fund strategies” under the ’40 Act fund structure – so who better to manage liquid alternative funds than hedge fund managers? Catalyst Funds has now converted three hedge funds to the liquid alternative format, including the recently launched Catalyst/Stone Beach Income Opportunity Fund (IOXAX). This new fund is a continuation of Catalyst’s strategy of bringing unique, single-manager strategies to the market and is the firm’s 6th product under its “Strategic Income” group of funds.
The Catalyst/Stone Beach Income Opportunity Fund
The new fund, which launched on November 24, is a conversion of the Stone Beach Special Opportunity Fund, LLC hedge fund, and it pursues the same strategy as its hedge fund predecessor. Stone Beach is the new fund’s sub-advisor and manager of the strategy, which primarily invests in U.S. residential and commercial mortgage-backed securities (MBS) and related instruments. The fund’s primary objective is current income, with a secondary objective of capital appreciation.
A few key points from the fund’s prospectus (please read the full prospectus for more details) are as follows:
- The Fund’s sub-advisor uses a relative value approach to profit from investment opportunities within the mortgage-backed securities market.
- The Fund employs an actively managed hedged strategy to limit declines in the net asset value of the Fund’s portfolio in adverse market conditions.
- In managing the Fund’s investments, the sub-advisor seeks to construct an investment portfolio with a weighted average maturity that ranges between 1 and 10 years and a weighted average effective duration that ranges between -5 and 5 years.
Catalyst CEO Jerry Szilagyi says the hedge fund on which the Catalyst/Stone Beach Income Opportunity Fund is based is a “proven strategy” that he and his colleagues at Catalyst are proud to bring to mutual-fund investors. “The addition of IOXAX to Catalyst’s product offerings continues our tradition of providing investors with a variety of liquid alternative strategies to complement a diversified portfolio,” he said.
The Catalyst/Stone Beach Income Opportunity Fund is available in A, C, and I share-classes, with respective net operating expense ratios, after waivers and fee reductions, of 1.55%, 2.3%, and 1.3%. The investment management fee is 1.25% and the minimum investment for all classes is $2,500 for qualifying investors.
Other Hedge Fund Conversions
Catalyst converted its second hedge fund in 2013, when it launched the Catalyst Hedged Futures Strategy Fund (HFXAX). Year-to-date through October 31, that fund has done well with a return of 9.93%, ranking it in the 16th percentile for the managed futures category, according to Morningstar. Catalyst’s first mutual fund to use a hedge fund conversation, the Catalyst Event Arbitrage Fund (CEAIX), launched in 2012 and has returned -11.83% for the year-to-date period ending October 31, 2014, ranking it in the 98th percentile for Morningstar’s market neutral category.
Based on SEC filings, Catalyst is looking to bring at least one additional fund to market in the near term whereby they will convert an existing hedge fund into a mutual fund. The new fund will be managed by Princeton Advisory Group, which already manages two funds for Catalyst: The Catalyst/Princeton Floating Rate Income Fund and the Catalyst/Princeton Hedged Income Fund. The new fund will be named the Catalyst/Princeton Credit Opportunity Fund and it will convert the Princeton Credit Opportunity Fund, LLC hedge fund into the mutual fund. Based on the initial prospectus filing, the hedge fund appears to have an inception date of August 1, 2012.
The new fund is due out on or around December 22 of this year and will carry a 1.50% management fee. The fund will focus on investing in fixed income instruments related to distressed companies, and will use shorting to both generate additional return and manage portfolio risk.