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Superfund Retail Pitch: Golden Opportunity or Fee-Laden Hazard?

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NEW YORK (–Hoping to attract the middle class investor, Quadriga Chief Executive Christian Baha has turned to celebrities. In January, Grand Prix racing champion Niki Lauda pitched Quadriga’s managed futures certificate for the German market.

This month, Mr. Baha invited Bill Clinton to a store opening in New York, according to published reports–part of a plan to sell Quadriga Superfund to Americans who have as little as US$45,000 in assets.

Mr. Baha himself, looking sophisticated in an all-black outfit, has appeared in ads on cable television channels. Of Austrian background, he operates out of Monte Carlo. His firm, now renamed Superfund Asset Management Inc., is domiciled in Grenada.

Americans invested about US$70 million in Superfund in response to an offer in 2002.

Mr. Baha, wanting to get at least another US$130 million, filed with the Securities and Exchange Commission to make a new attempt to sell his managed futures vehicle to the public and started a broad marketing campaign.

The firm manages US$1.7 billion in assets worldwide. Quadriga AG has been available in the European mass market since March 1996 and boasts an average annual return of 22%. The U.S. version, introduced in November 2002, made 17% a year since launch.

Those numbers are net of fees, and therein may lie a wonder. Superfund fees are high even by hedge fund standards. The American offering charges 25% for performance, 1.85% for management, 4% as a sales commission, 1% for organization and offering expenses and another 0.15% for operating expenses.

That doesn’t count brokerage fees, which add 3.75%. To break even, Mr. Baha’s trading system has to rake in at least 8.75%– celebrity-studded publicity campaigns don’t come cheap, and neither does a lot of trading.

“There’s a sucker born every minute,” said Ira Kawaller, a futures manager in Brooklyn, N.Y. “This isn’t to say that they don’t have a program that may very well yield impressive results,” he added. As it happens, his own fund, Kawaller & Company LLC, also has an average annual return of 22% over a five-year period.

Soros, Buffett and Ford

Mr. Kawaller pointed out that it’s important to look at month-to-month volatility, not just returns. Managed futures programs typically are highly volatile. Superfund’s performance is less impressive when the high annual standard deviation (33.5%) is factored in; the Sharpe ratio is 0.52.

Still, Quadriga AG has delivered attractive profits over the years, rich fees and all. “Public funds tend to be very expensive,” said another manager. “But if these returns are real, the firm will be the next George Soros and Warren Buffett combined.”

What is more, Superfund helps diversify a portfolio, with its low (11%) correlation to the Standard & Poor’s 500 stock index. The less-than-wealthy may very well benefit from including it in a diversified portfolio–especially at a time like this when neither bonds nor stocks look riveting. Mr. Baha could turn out to be the Henry Ford of managed futures, popularizing something that only the rich enjoyed previously.

The two series offered in the United States, one more leveraged than the other, are based on a trend following technical strategy that trades in some 100 futures and foreign currency markets worldwide, including both commodity and financial futures.

Stock indexes account for 18% of the portfolio, currencies for 18%, and energy for 13%. It also contains instruments for grains, livestock, agricultural products, metals and interest rates. The program emphasizes instruments with low correlation and high liquidity.

A filing with the SEC states that “human emotions are completely eliminated from the capital management process”. The proprietary software embodied in the trading system examines a broad array of investments around the world to identify possible opportunities that fit the selection criteria.

New market conditions, however, could make this black box less useful, bringing an end to the vigorous returns. Then, the heavy fees and expenses would take a large bite from investors’ capital.

Another question is Superfund’s relations with regulators. In his commercials, Mr. Baha coyly refers to restrictions on what he can say–two years ago, the SEC forbade him from using the term “hedge fund” in describing managed futures products.

Will his aggressive sales tactics again draw regulatory ire? The SEC did not respond to a message seeking comment. So far neither the SEC nor the Commodity Futures Trading Commission, with which Quadriga is registered, has indicated that there’s anything wrong with Mr. Baha’s campaign. But that could change.

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Contact Bob Keane with questions or comments at: [email protected].


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