questions to be answered!, page-12

Have held this stock for around 18 months at this point and don't intend to sell.

When I first acquired them it was on the back of two reasons. One the consistency in their dividend payments and two, the structure of the fund. I am not aware of many others that employ the long/short approach. I would encourage anyone who hasn't yet to watch the 1hr video posted on Watermarks website: http://player.vimeo.com/video/115086151?portrait=0

Now I have seen a few posts on here regarding not understanding their strategy etc. It can be a little tricky to get ones head around, but it is VERY important to do so as it will explain what has been occurring with the NTA vis-a-vis the asx 200 index.

As a couple of other posters have alluded to, they look at the universe of stocks and undertake an analysis to determine intrinsic value as calculated by ALF. Those stocks they perceive are undervalued they will go long, and those stocks they perceive to be overvalued they will short. That is the crux of it.

However, something VERY important to understand is that even if the net exposure of the fund is low - that is to say, the market value of the shorts almost matches off the market value of the longs (as it is now) - it’s the REALTIVE performance of those positions that matter. Importantly: low net exposure (in ALF's case) does NOT mean (i) a fall in the asx 200 will see NTA increase, or at least a relative outperformance of ALF NTA vs the asx 200 and (ii) is hedged for market movements.

This is why, when for example the asx 200 has a great month, ALF's NTA could go up, down or sideways - it’s all down to stock selection. In order to perceive value in ALF one fundamentally has to have faith in the stock selection ability of Justin and co.

Even watching the video they posted, I don’t think Justin makes it crystal clear for non-finance people exactly how the structure works. For instance, the WMK fund which is described as "market neutral" is not technically market neutral - market neutral, the way it is sold, implies it’s fully hedged for market moves. Whereas, what is actually occurring is that $100 of long positions is offset with $100 of short positions so the NET market exposure is $0 but that will only stay the case if the longs and shorts perfectly offset each other in daily returns. If the shorts rally (not what you want!) and/or the long sell off (again not want you want) then the NTA will fall.

In closing, this is what has been occurring with ALF. Overall, the short positions have rallied whereas the longs have sold off - so the double whammy so to speak and hence the significant fall in the NTA. What we need is for the longs to start performing and the shorts to sell off.

ALF was trading at a significant premium to NTA which is a market function. Even though the NTA has fallen, somewhat reassuring is that fact that the volatility in the NTA is far less than that observed for the share price. ALF is not THAT liquid and so a large holder or two selling can send its price down 5c to 15c easily. I suspect that is what has happened here. I could be wrong, but I would be surprised to see a change in substantial holder notice from a company employee. Further, if ALF was an unlisted entity and just traded at NTA, its performance over the last 6 months wouldn’t be perceived to be as bad.

Oh, and one more thing, there seems to be the perception that ALF is a good hold if one thinks the market will fall given their shorting capability. Again, this is only true if they get stock selection correct. As us holders have seen even when the market sold off, ALF's NTA didn’t rise due to poor stock selection.

I continue to hold, and am happy to do so. The next two dividends are locked in but I hope their stock selection can improve over 2015. They have had a great track record up until 6 months ago. Persistence in fund manager returns is very hard to come by, but I continue to have faith in Justin and co to make things right over 2015. The big question would be if come Dec 2015, performance is not better, than it’s a different world.