Fund performance 31
the meantime let’s look at what you can do to see if the fund is really
making your money work for you.
Fund performance
At the end of the day of course we are all interested in performance
and how much money we will make if we invest in a fund and entrust
our money to a manager. We also know that past performance is not
indicative of future performance. For the purposes of this chapter,
however, what I really want to do is assess this past performance and
determine what it might tell you about the fund.
Track record
The track record of a fund is its performance over the years and this
information is usually one of the easiest and most accessible to obtain.
To trumpet monthly returns is the basis of all fund marketing. A long
show of data is usually deemed to be a measure of stability and some
investors will require a minimum track record of three years or more
before they will invest. This is because an established fund with a long
track record provides more reliable information on past performance
that can be used to evaluate the fund’s current position and risk pro-
file, while a fund with little or no track record provides no basis of
comparison to evaluate its approach to investing. Though past per-
formance is not indicative of future results, a solid track record grants
additional insights into how the fund performs following certain
investment decisions and during different economic cycles. However,
a track record can be misleading and should be thoroughly checked.
For example, sometimes funds will merge the historical performance
of more than one fund. Further, the track record of a fund can be the
work of various individuals, leading to certain complexities when
it comes to understanding who was responsible for the results and
whether it was the product of one or more investment professionals.
Remember that the values noted on any factsheet or marketing record
depend on the manager alone and are not legally binding even if rules
apply as to how they are expressed (see more about that in Chapter 9).
It is therefore vital to check such data. This can be done easily by using
32 2
The fund
simple tools like Bloomberg, Reuters or any data sourcing software.
Often small mistakes in the track record will give clues about the his-
tory of the firm in question or its degree of compliance or corporate
governance which is insightful when measuring the reliability of the
manager as a trusted investment company.
For a practical illustration consider the false track record of Lake Shore
Asset Management.
Lake Shore Asset Management – a false
track record
In brief:
Lake Shore Asset Management (‘Lake Shore’) managed a Chicago-
based hedge fund that traded in US commodities futures contracts.
Lake Shore claimed to manage $1 billion for investors; however
a CFTC investigation in 2007 showed that its fund only had
approximately $466 million. The CFTC immediately froze $228
million of investors’ money.
The fund was found to have a false track record and Lake Shore
was accused of having delayed providing requested information to
the CFTC.
The CFTC’s findings were that:
Lake Shore falsely stated that it had generated positive returns
since 1993;
the fund failed to trade at all before 2002; and
the fund had experienced high trading losses between January
2002 and September 2007.
In August 2011, Lake Shore’s founder, Philip Baker, pleaded guilty
to running a $292 million fraud. He was sentenced to 20 years in
prison in the US in November 2011.
Lessons learned
Track records may be misleading or false – a simple check on the
historical trial balances would have revealed that Lake Shore’s track
record was unreliable.
case study

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