At its heart, the Σ1 Fund takes a quantitative investing approach.  I am not primarily a stock picker, though over the years I’ve had success with my occasional picks.  I am primarily a quant believing in some market mispricing, particularly equity option miss-pricing and well as bond miss-pricing.  However, I believe that markets are generally efficient.  In particular true arbitrage opportunities are infrequent and fleeting.

The Σ1 Fund will be in many ways a hedge fund. First, it will systematically hedge many of its stock positions.  Second, it will apply margin and leverage.

Initially I wish to apply an investing approach and principles I’ve been developing over the past 5 years. I plan to refine, tune, and rigorously test this investing approach.  Over time, I want to code this approach so that more and more aspects are algorithmically defined.    Testing and “proving” both the broad conceptual framework as well as testing specific algorithmic implementations will require months, perhaps a year, of work.

I ask myself what value-adds will distinguish the Σ1 Fund from the numerous fund out there.  Here are a few key distinguishing points:

1. Innovative, industry-leading transparency for a hedge fund.
2. Far lower overall expenses than typical for a hedge fund.
3. Far lower investment minimums than a typical hedge fund.

If the fund performs well, one important Balhiser LLC asset, will be the Σ1 Fund strategies and trading algorithms. One challenge I foresee is a dissonance between  transparency and secrecy of the underlying trading algorithms and code.  Disclosure of the specific algorithms will not be part of the contract.  However, slightly-delayed disclosure of the fund’s holdings, under NDA, will be available to members of the proprietary trading group as well as their CPA.  This will be a delicate balance, requiring the fund to place a measure of trust into the hands of its clients.  When in doubt I hope to err on the side of greater transparency.

While there is much more on my mind, I will wrap things up for today’s blog.  I wrap up with a few other principles:

• No “window dressing”.  This a cheap and transparency-reducing trick.
• Benchmarking.  The Σ1 Fund is a hybrid fund and will be hard to categorize.  Nonetheless I have tentatively chosen to select two benchmark indexes:

DJ Wilshire 5000
MSCI U.S. Broad Market Index

** Disclaimer:  This contains forward-looking statements that reflect the author’s current thoughts and assumptions.  As such all comments, etc are subject to significant potential change and revision.