Seven questions about a 130/30 fund.

The two equity funds do. Each holds small short positions against companies, ones that profit if the company falls behind. A manager who studies the whole market learns as much about weak businesses as strong ones, and in an ordinary fund most of that knowledge goes in a drawer. Here both sides of that research reach the portfolio. The growth fund uses the short side to extend its ranking, and the dividend fund uses it to blunt part of a decline.¹

Those positions are deliberately small and spread across many names rather than concentrated in a few, each kept to a size the fund can afford to be wrong about.

The income fund is different. It shorts bonds rather than shares. It holds corporate bonds and sells government bonds short to keep its sensitivity to interest rates low, and it can also short a borrower’s bonds where the credit work turns against it.

What the fund borrows is mostly shares, not money. To take a position against a company it borrows that company’s shares, sells them, and buys them back later to return them. The proceeds go straight into more of what the manager wants to own, so the fund rises and falls with the market by about as much as your money would have on its own.

Cash borrowing is a separate thing, and the offering documents permit a little of it against a strict limit. A leveraged fund borrows so that it can own several times what you gave it, and the limits here are set far below that. In practice all three funds keep net exposure close to a dollar for each dollar invested.

The fund is ordinary in the ways that reach an advisor’s desk. Units will be priced every business day in Canadian dollars and will settle through Fundserv, the same plumbing your advisor already uses, on the usual timetable and with the usual paperwork. Units will be eligible for registered plans: RRSP, RRIF, TFSA, RESP and LIRA. The idea inside is the new part. Everything around it is kept familiar on purpose.

Who may buy is not ordinary yet. The funds will be offered under a prospectus exemption rather than a prospectus, which means accredited investors only, a minimum first investment of $25,000, and residents of Alberta, British Columbia and Ontario.

There will be years the funds trail, and we can name them in advance. For the two equity funds, the danger is a fast, speculative rally led by the market’s weakest names, the very companies the managers are positioned against. Gains concentrating in a small handful of fast risers hurt too, and so does a long stretch where strong, profitable companies go unrewarded, which lasts longest and is hardest to sit through.

The income fund’s bad markets are different. The worst is a panic that sells corporate bonds off while lifting the government bonds it has sold short. A fall in interest rates hurts too, because the fund is built for flat or rising rates. Even then, a bond held to maturity repays its face value and the interest along the way, as long as the company behind it can keep paying.

The three funds are built in three different styles, and the markets that hurt them are mostly different too, so holding more than one spreads your money across strategies that lag at different times. This is not a promise. A bad enough market can still hurt all three at once.

On Series FS, the fee-based series, the management fee is 0.55% for the income fund and 0.65% for each of the equity funds; with expenses, the estimated total yearly cost is 0.81% and 0.91%.² Those fees are lower than what nine in ten comparable Canadian alternative funds charge; the median management fees are 0.85% for alternative credit funds and 0.95% for alternative equity funds. There are no performance fees, so we never take a slice of a good year on top.³

Series FS is open to everyone for the first six months after launch. After that it requires $20 million in aggregate holdings, from one investor or across an advisor’s clients.

Four of the five principals ran similar strategies side by side for nearly a decade at the same Calgary investment group; their names, credentials and employers are on the team page. That record belongs to the funds that earned it, and we do not claim it as ours.

The rest comes from how we are set up. Each fund is measured against a standard published index. One manager owns each fund’s results, inside limits the firm sets. The environments where each strategy struggles are written down before you invest. And Calterra’s only revenue from the funds is its management and administration fees, so nothing we earn would grow by taking bigger risks with your money.

When the funds open, the principals intend to buy in as ordinary investors, in the same series of units and at the price and fee everyone else pays. A bad year in a fund would land in their accounts too.

Not us. The funds’ assets are held at BMO, which is custodian and prime broker: the bank that holds the assets and handles the funds’ trading. SGGG Fund Services is administrator and transfer agent, keeping the register of who owns what. MNP audits the funds and DLA Piper is legal counsel. Calterra is small. Its custodian, administrator, auditor and counsel are not.