Vicente Andres Zaragoza has generated an average return four times the return of his peer managers helped by original software designed by his company. His fund, the $100 Million Pentium Quantitative Fund, one of four in his group, uses this software to analyze date from almost 400 other portfolios to determine how effectively other managers hedge their portfolios and produce positive returns in both rising and declining markets.
As Zaragoza so descriptively says, "The pattern of a manager's historical performance tells us quickly if he is hedging or running a virtual gambling casino."
Managing funds that total around $400 Million, Zaragoza seeks returns that are consistent and regular, not necessarily high. This philosophy mirrors an unusual probability and statistical theorem called "negative kurtosis", which if graphed would display a smooth curve without any sharp spikes. With little deviation from the mean, it displays smaller profits than many other hedge funds but a much higher consistency of positive returns than those that concentrate on taking gains from just a few investments.
For instance, Pentium Quantitative recently had returns of 16.2% which compares very favorably with of 7.5% generated by the average hedge fund during the same period. In the next time frame, Zaragoza's fund earned 26.2% while the Hedge Fund Research Institute's composite index increased 6.5%. As you can see, although Zaragoza's strategy is to hedge to the degree that short term profits are often smaller than most of his peers, his dedication to consistency can produce excellent returns over the longer term. Zaragoza believes that his regular and consistent returns prove that he is an effective manager who hedges investments and avoids taking unfounded risks.
Born in Spain, Zaragoza spent his younger life in the Philippines, studying engineering at LaSalle University in Manila. His father, an architect, suggested he study business. While not originally enthused, Zaragoza enrolled at the Asian Institute of Management where he learned the basics of investing. He continued his studies at the International Institute for Management Development (Lausanne, Switzerland), where his investment skills were further polished and from which he graduated in 1984 with an M.B.A.
Since 2003 Zaragoza has been using the proprietary software developed over a 2-year period by his creative team. The software which examines manager performance and detects trends shown by groups of hedge funds, provides a score sheet, rating managers and their correlation, positive or negative, with the S&P 500 index. Zaragoza states that this data allows him to "manage managers", using those that have positive results to mimic their philosophy to enjoy market trends and provide hedges for themselves.
Recent data shows that there are more than 8,000 hedge funds in the market controlling over $1.3 Trillion assets. Zaragoza's super software only examines a statistic sample (around 5%) of these funds, not the entire market. Using a strategic sample to generate good results depends on the quality of the sample and it appears his software is effective to date.
His strategy has so far worked well. If the S&P 500 index moves up significantly (say over 10%), he will have Pentium Quantitative invest significant assets (say, 40%) in those hedge funds that show a high correlation to the index, while protecting the fund by investing currency in funds that have assets in the foreign exchange markets. If the index quickly drops, Pentium can still make positive returns through the foreign exchange market hedge.
But what happens to returns over the longer term? In 2003, Pentium Quantitative jumped by 61.4% versus the Hedge Fund Research Institute's 11.6%. Also, in 2004, Pentium increased by almost 25% while the HFRI's composite index increased 6.9%. Investors are obviously happy with these historical results.
Hedge fund investors regularly pay around a 2.0% fee to manage their money which is in addition to paying around 20% of the profit generated by the fund and its management. While most investors would prefer not to have these fees, they expect higher returns and therefore expect to pay for the privilege. That has not stopped the heavy criticism that hedge funds cost clients double fees which are high in relation to the average rate of return. Since most hedge fund investors are veterans of the market, they are well aware that these dual fees are reducing their returns and are beginning to effect and/or change the reason for making these investments at all. Reports are increasing that some of this group are moving money from these "funds of hedge funds" into more limited-scope (called single-strategy) funds. With average returns in the 7.00% range for funds of hedge funds, investors often believe that pure limited strategy hedge funds will provide better returns and risk management than they will realize in relation to the above fee levels.
Zaragoza's Pentium Quantitative, based in Geneva, charges 1.5% annual management fees and retains 15% of returns generated, somewhat less than common practice. Admitting that it costs more than normal investments as a whole, Zaragoza still maintains, "It just feels better knowing that your life or your money is well tended to. Don't think of the costs; think of the results." Others agree, many stating that, though possibly costly, this strategy remains the most sensible way to invest.
As with the majority of hedge funds, Zaragoza's Pentium does not reveal the identities of the funds in which it invests or the managers in their favor, but he will admit that in the past year, Pentium's funds were placed with around 25 hedge funds and more are scheduled to be added. A full 50% of his portfolio was placed with funds that bet on or against equities, while the remainder was invested with funds that profit from pure business events, such as restructurings, reorganizations, mergers, consolidations, and/or acquisitions.
While not the only fund in his group (others are involved in commodities, energy, and other diversified investments), Zaragoza states that Pentium Quantitative is the most conservative of the collection. As he humorously - but honestly - admits to anyone who asks, "I designed this fund for my mother and my sister, who aren't willing to accept even a 1% loss." His investment group is most happy he left his engineering studies to become a sophisticated hedge fund designer and manager.