Policy Statements
Theta is a long/short options investor with a short bias focusing on 30 and 60 day futures - determined by market volume and volatility.
In simple terms, Theta collects premium like an insurance company collects premium in return for insuring your car. Your car insurance policy expires after 12 months and the insurance company keeps your premium with no further obligation to pay you - even if you crash your car - unless you re-insure for another term of course.
Theta operates like the "insurer" except the contracts expire every 30 or 60 days - at which time Theta keeps the premium as profit.
Continuing with the insurance example, if an insurer insured a "high risk" driver, they would collect a higher premium.
If they insure a "low risk" driver, they collect much less premium - the premium simply reflecting the 'risk' associated with the insurance contract.
Theta operates by collecting smaller premiums with much less associated risk. It therefore makes less profit per individual contract (but at much lower risk), instead looking to achieve compound returns over time (profits realised every 30 or 60 days and rolled over).
Theta strives to achieve Absolute 'Alpha' Returns, measuring ourselves on the ability to make a profit in a rising and falling market based on our skill as individual traders and not relying on the performance of other fund managers, individual stocks or indices.
It is this low correlation to other funds and indices as well as the Absolute Return characteristics and relative liquidity of the Funds (able to access capital quarterly) that make Theta a highly suitable retail investment component in an overall mix of asset classes.
Any cash deposits made prior to the last closing business day of the month will not earn interest for the investor. In order to maximize their own returns, investors should retain their funds in their own cash management account and arrange for a deposit to be made with the Custodian in accordance with the PDS prior to the close of the last business day of the month.
Theta does not apply a buy/sell spread to investors. However there is provision in the PDS to do so at Theta's discretion.
The buy spread is applied to deposits made into the Theta Fund (Fund) and is charged in order to bring a new investor into line with the existing investors in terms of the costs borne by those existing investors to create the trade positions from which the new investor will in turn benefit.
The proceeds from the buy side of the spread are paid into the fund.
The sell spread is built into the Unit Price. This means that by redeeming your funds from the fund, you do so at an audited unit price that has factored in all costs associated with getting your investment to the point of exit.
The Buy/Sell Spread is fixed each year and adjusted annually as required and noted in the PDS.
The Annual Tax Statement is issued to investors following the completion of the June monthly Audit and then the Annual Audit each year.
It provides all of the information relating to your investment that an auditor / accountant would want to see in the preparation of your respective tax returns.
Part C: Statement of Holdings seems to cause the most confusion - here is an explanation using the June 2008 data.
| |
Effective date |
Investment Value ($) |
Price ($/unit) |
Units |
Opening balance |
29/02/08 |
10,000 |
1.0000 |
10,000 |
Closing balance (pre-distribution unit price) |
30/06/08 |
10,356 |
1.0356 |
10,000 |
Cash Distribution |
30/06/08 |
(347) |
0.0348 |
10,000 |
Distribution reinvestment (post-distribution unit price) |
01/07/08 |
347 |
1.0008 |
347 |
Opening balance |
01/07/08 |
10,356 |
1.0008 |
10,347 |
This investor started when the fund was first established. They invested $10,000 on 29 Feb 2008 and the unit price was 1.000 so they received 10,000 units.
On the 30th June 08, the unit price had risen (the fund had made a profit) and the "pre distribution unit price" was 1.0356 (the fund had made 3.56% for the few months it had been trading).
For every unit held by an investor, the fund actually only distributed 0.0348 units (3.48%).
Why not the full 3.56%?
If the fund made 3.56% net to investors for the few months to 30 June 2008 (1.0356 pre-distribution unit price), how is it that the total units issued to investors is less (0.0348)?
The answer is a timing issue between the mark to market valuation of the fund at the time the pre distribution unit price is "struck" and when the "tax distribution" takes place - caused mainly by either minor movements in foreign exchange or an adjustment in the book value caused by open trade positions.
In this instance the adjustment results in a lower tax distribution than one would have expected.
In order that this tax adjustment does not carry forward, the "post distribution unit price" is adjusted up for 1 Jul 08 to 1.008 to compensate (instead of 1.000).
You can see from this example that this investor commences the new tax year with "more units" (10,347) and the value of their investment has still grown to $10,356 (3.56%) because the unit price is higher than 1.000 at 1.008.
Theta will automatically roll the tax distribution back into your fund as additional units unless you ask to redeem these units.
There is no establishment fee (buy spread) for this re-investment.
The statement should form part of your annual tax return and you should obtain individual tax advice as to the extent to which any profits might be deemed income or capital gain.
Part D Management Expense Ratio (MER) provides an exact breakdown of the management fees and profit as a % of the average net asset value of the fund. See below for a more detailed explanation of the MER.
| Expenses expressed as a percentage of the Fund's average net asset value. |
|
% |
Theta management fees |
2.000 |
Theta Performance fees |
6.639 |
Note: Despite their being provision in the PDS, Theta does not apply a buy/sell spread to investors entering or leaving the fund.
The Management Expense Ratio (MER) is a ratio, expressed as a percentage per annum, used to capture expenses incurred by Theta. The MER excludes charges that would be incurred by a direct investor in the same asset class (ie brokerage).
The MER includes the following:
* Management Fees (Theta as Fund Manager): |
2% pa |
* Profit Share (Theta): |
20% x New Profits |
* Buy Sell Spread (payable back into the fund): |
0.3% |
Because changes in New Profits as a % of the overall Fund size varies, the MER is not constant. The following table illustrates the MER for various monthly profit levels.
MER Calculation Matrix
Earnings (mth) |
0.00% |
0.50% |
1.00% |
1.50% |
2.00% |
2.50% |
3.00% |
Earnings (pa) |
0.00% |
6.17% |
12.68% |
19.56% |
26.82% |
34.49% |
42.58% |
Theta Management Fee |
2% |
2% |
2% |
2% |
2% |
2% |
2% |
Buy Sell Spread |
0.30% |
0.30% |
0.30% |
0.30% |
0.30% |
0.30% |
0.30% |
Profit Share (% of fund) |
0.00% |
1.23% |
2.54% |
3.91% |
5.36% |
6.90% |
8.52% |
MER |
2.30% |
3.53% |
4.84% |
6.21% |
7.66% |
9.20% |
10.82% |
Net Profit to Investor (annual) |
-2.3% |
2.64% |
7.84% |
13.3% |
19.16% |
25.29% |
31.76% |
Theta's FOREX hedging policy has been developed to provide cover for any "gapping" in FOREX rates against the AUS$ during times when Theta has excessive currency exposure.
Maximum FOREX exposure of the fund is based on the size of the Fund being held in the Trading Currency (in this example, we have used EURO). The exposure to Theta is associated with an increase in the value of the AUS$ relative to the EURO€.
The size of the Theta EURO account is governed by the margin requirements of the fund covering short contracts and any EURO held for the acquisition of contracts.
Theta hedges against currency losses by selling foreign currency contracts. This is only conducted when the potential FOREX exposure to the Fund exceeds the cost of maintaining a FOREX presence.
The exposure to currency movements ranges from 0.5% to 1% of the fund value for every percentage increase in the value of the Australian dollar against the foreign currency. This is based on the following formula:
Margin Utilisation (%) x Change in AUS to Foreign Currency (%)
EUR / AUS Conversion rate
|
X
|
Fund Size
|
Theta will hedge against currency losses whenever the fund balance exceeds AUS$10M. This policy will be reviewed on a constant basis.
Policy governing ongoing exposure to FOREX
Theta uses Interactive Brokers LLC as its clearing house for the execution of all trades.
By doing this, Theta significantly reduces its (and consequently its investors') counter party risk in the sale and purchase of contracts.
Interactive Brokers LLC is a member of the New York Stock Exchange (NYSE), the Financial Industry Regulatory Authority (US) and the Securities Investor Protection Corporation (US) and is regulated by the US Securities and Exchange Commission and the Commodity Futures Trading Commission. Headquartered in Pickwick Plaza, Greenwich, CT 06830 USA, Interactive Brokers LLC provides broker services throughout the world and between it and its affiliates, holds US$4.4Bn in Equity Capital.
When Theta enters into a short trade on the European Market, Theta must maintain margin in EURO€ for that trade. To enter into a long contract, where no margin is held, the purchase of the contract on the European exchange must also be done in EURO.
Interactive Brokers do not exchange Base Currency into Trading Currency.
Theta must either purchase EURO by completing a FOREX trade (EURO/Aus pair) or IB will automatically "loan" the EURO to Theta, and charge interest on this loan.
Interest payable on the loaned EURO is based on a premium over and above a Benchmark Rate (BM) depending on the loaned amount (3 tiers of rates). Interactive Brokers uses internationally recognized benchmarks on overnight deposits as a basis for determining interest rates. They then apply a spread around the benchmark interest rate ("BM") in tiers, such that larger cash balances receive increasingly better rates, to determine an effective rate.
The Benchmark rate can be found by going to the following website (http://www.interactivebrokers.com/en/accounts/fees/interest.php?ib_entity=llc) and identifying the Trading Currency (in Theta's case, EURO)
The interest rate charged on the borrowed currency can then be determined by reviewing (http://www.interactivebrokers.com/en/accounts/fees/interest.php?ib_entity=llc).
The following table is an example of the relative merits of maintaining AUS or EURO earnings on cash reserves in the fund:
Maintaining a Positive AUD cash Account (Borrowing EURO) |
2.875% pa |
- |
1.337% pa |
= |
1.54% pa |
Interest earned on cash held in AUS Account |
|
Interest charged on borrowing |
|
|
Maintaining a Positive EURO Cash Account |
0.587% pa |
- |
2.875% |
= |
(2.29)% pa |
Interest earned on cash held in EURO Account (Tier II) |
|
Lost interest opportunity earned on cash held in AUS Account |
|
|
Maintaining a Neutral EURO Cash Account (no borrowing / no excess EURO) |
2.875% pa |
- |
0% |
= |
2.875% pa |
Interest earned on cash held in AUS Account |
|
|
|
|
It follows that Theta's policy is to maintain a neutral EURO / FOREX Account where possible.
This is managed by reviewing the Account Management data which is updated daily and available electronically. The Market Value provides a breakdown of Total Cash including AUD and FOREX. Interactive Brokers platform is then used to enter the FOREX trade.
Note: This deposit rate should not be confused with the deposit rates earned by investment of Capital Protected Fund proceeds.
Theta weights its return relative to risk by determining the Sharpe Ratio (a market recognised risk weighting).
The Sharpe ratio was developed by Nobel laureate William F. Sharpe to measure risk-adjusted performance. The Sharpe ratio is calculated by subtracting the risk-free rate (Theta uses the 10-year U.S. Treasury bond) from the rate of return for a portfolio and dividing the result by the standard deviation of the portfolio returns.
The Sharpe ratio tells us whether a portfolio's returns are due to smart investment decisions or a result of excess risk. This measurement is very useful because although one portfolio or fund can reap higher returns than its peers, it is only a good investment if those higher returns do not come with too much additional risk. The greater a portfolio's Sharpe ratio, the better its risk-adjusted performance has been. A negative Sharpe ratio indicates that a risk-less asset would perform better than the security being analysed.
Determining a "good" Sharpe ratio is a comparison exercise between risk and associated return. For the purposes of this policy document and to assist investors who have not heard of or fully understand the Sharpe ratio, Theta considers a good Sharpe ratio to be 2.00 or better and an excellent Sharpe ratio to be greater than 3.00.
VAR answers the question, "What is my worst-case scenario?" or "How much could I lose in a really bad month?"
VAR has three components: a time period, a confidence level and a loss amount (or loss percentage).
The confidence level is expressed as a 99th percentile or a 95th percentile. In other words, What is the worst loss I could expect to have in dollars or % terms over the next month - with a 95% or 99% degree of confidence.
It is a special type of downside risk measure designed to provide investors with an estimate. Rather than produce a single statistic or express absolute certainty, it makes an estimate based on performance to date.
Theta uses the Variance-Covariance method of calculating the VAR.
Theta benchmarks its profit performance against the Morningstar Peer Group Retail Investment Trust Alternative - Global Hedge Funds Index.
This index is a measure of those funds that seek to exploit differences in stock prices by being long and short in stocks within the same sector, industry, market capitalization, country, etc; creating a hedge against market factors.
Morningstar is well suited as a benchmark due to the trading techniques employed by Morningstar rated funds.
Theta monitors its trading performance by comparing the daily Mark to Market Valuation of the Funds relative to a number of global indexes.
This not only ensures that investors are earning Alpha returns, but provides a degree of comfort that the Funds will not be directly impacted by global index movement.
