With the advent of liquid alternatives, several successful hedge fund managers have begun to make their offerings more widely available to the investing public via ’40 Act mutual funds. Joel Greenblatt, author of The Little Book That Still Beats the Market and inventor of “magic formula investing,” is one such hedge-fund manager. Mr. Greenblatt founded the Gotham Capital hedge fund in 1985, which produced annualized returns of 50% per year through 1995, according to his 1997 book You Can Be a Stock Market Genius. Now Greenblatt and longtime partner Robert Goldstein manage four alternative mutual funds, including the Gotham Absolute 500 Fund (ticker: GFIVX), which launched on July 31, 2014.
Gotham Absolute 500 Fund
The Gotham Absolute 500 Fund is a long/short equity fund designed to achieve positive returns during most annual periods, with the goal of long-term capital appreciation in an “efficient, risk-adjusted manner.” While Gotham’s original fund, the Gotham Absolute Return Fund, is also a long/short equity fund, it is generally limited in its gross notional equity exposure to 190% (e.g. 130% long and 60% short, or some combination thereof) while the Absolute 500 Fund can go as high as 250% in gross notional exposure. The fund is only available in an institutional share class, with a listed minimum investment of $250,000, a 2.00% management fee and a 3.2% expense ratio.
Joel Greenblatt and co-manager Robert Goldstein will primarily invest in S&P 500 stocks and related securities – both long and short – although the fund may invest in large-cap stocks that aren’t in the S&P 500, particularly stocks that rank in the top 500-700 largest by market cap. Greenblatt and Goldstein research and analyze companies based on a proprietary methodology that emphasizes fundamental measures such as recurring earnings, capital efficiency, and valuation – this is somewhat similar to the “magic formula” articulated in Greenblatt’s 2006 The Little Book That Beats the Market, as well as its 2011 follow-up. Greenblatt and Goldstein will also exclude from consideration any company with “questionable” financial reporting.
Other Gotham Funds
In addition to his fame as an author and reputation as a hedge-fund manager, investors have another reason to be interested in Greenblatt’s latest fund: The three he’s already launched with partner Goldstein have performed quite well: Greenblatt’s other liquid alts funds include the Gotham Absolute Return Fund, the Gotham Enhanced Return Fund, and the Gotham Neutral Fund.
- The Gotham Absolute Return Fund is an all-cap long/short equity fund that debuted on August 31, 2012. Through August 8, 2014, the fund had generated total returns of 42.5% since inception, and 4.9% year-to-date. The fund has $2.1 billion in assets under management, and a 2.2% expense ratio.
- The Gotham Enhanced Return Fund is a long/short, beta 1 fund (170% long, 70% short) that is categorized by Morningstar as a “midcap blend” fund. It debuted on May 31, 2013, and had generated total returns of 32.7% since inception, and 8.4%, year-to-date. The fund has $1.1 billion in assets under management, and a 2.25% expense ratio.
- The Gotham Neutral Fund debuted on August 30, 2013, and had generated 13% returns since inception, through August 8, 2014. Year-to-date, this market neutral fund had generated 6.8% returns. The fund has $500.8 million in assets under management, and a 2.25% expense ratio.
A summary of the investment profile of the four funds is below:
The total asses in Gotham’s four funds is quickly approaching $4 billion in assets under management, all within two years of launching their first fund. Both Greenblatt and Goldstein have over $1 million of their own capital invested in each of the initial three funds, and likely have similar investments in the new Absolute 500 Fund. They both certainly follow the adage of eating your own cooking.