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Arlington Ranger Fund October Letter


Parsad
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This is the October Letter written by Ben Raybould, who runs Arlington's Ranger Fund.  Ben wrote a pretty interesting letter discussing the performance of his partner, Allan Mecham, who started Arlington.  I don't post alot of letters, other than a few close friends that I admire, but Allan deserves recognition in my opinion. 

 

He's one of the best managers I know out there, and he is an incredibly humble guy.  Probably not too keen on this even being printed here, but I do have permission.  He'll probably show up to our dinner again this year, so you guys may want to ask him then how his leveraged bet on Berkshire is doing...I'm guessing pretty good!  Cheers!

Arlington_Value_Oct_2012_Investor_letter.pdf

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Awesome, thanks Parsad.

 

By coincidence, today I noticed how terrible BRK stock has been performing these last few days. It is really remarkable how little recognition this gem is getting a year after Bufett's stock buyback plan. Even after a nice run-up, it remains one of the best values out there imo!

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Guest hellsten

Thank you! 20-30% relative out-performance. I guess you could call him a genius. Interesting to see Bill Miller included in the comparison.

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I am probably too small a fry for them to consider anyway.

 

Kind of funny that the government is trying to keep me from losing money by not letting me invest with this guy.  If they really wanted to help me they'd make a rule against me investing my money. :)

 

Seriously, I always thought that was a stupid rule.  Because you have a million dollars you must know something about investing?  They ought to give you a test.  Or , even more radically, stay out of it and let people make their own decisions.

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I am probably too small a fry for them to consider anyway.

 

Kind of funny that the government is trying to keep me from losing money by not letting me invest with this guy.  If they really wanted to help me they'd make a rule against me investing my money. :)

 

Seriously, I always thought that was a stupid rule.  Because you have a million dollars you must know something about investing?  They ought to give you a test.  Or , even more radically, stay out of it and let people make their own decisions.

 

Yea it's a bunch of bullshit. With this rule, the rich can get richer, while those of us who are not millionaires have less opportunity to become one. Similar to options trading rules.

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I am probably too small a fry for them to consider anyway.

 

Kind of funny that the government is trying to keep me from losing money by not letting me invest with this guy.  If they really wanted to help me they'd make a rule against me investing my money. :)

 

Seriously, I always thought that was a stupid rule.  Because you have a million dollars you must know something about investing?  They ought to give you a test.  Or , even more radically, stay out of it and let people make their own decisions.

 

Yea it's a bunch of bullshit. With this rule, the rich can get richer, while those of us who are not millionaires have less opportunity to become one. Similar to options trading rules.

 

The rule may or may not be stupid, but it isn't intended to reflect whether or not someone knows anything about investing.  Rather it is intended to separate those who are sophisticated from those who aren't.  Those who are sophisticated, in the eyes of the law, are deemed to require less protection.  It is a paternalistic requirement, but in many ways a good one.  It has prevented many a small investor from getting snared in things they don't understand.  Now you may feel it biases you unfairly and that may very well be true, but there has to be a bright line rule in which to effectuate the law.  It would be administratively impossible to have a system in which each situation is determined on a case by case basis.  So in your respective cases you may have been burdened, but there are plenty of people who may jump into a fund like this, no matter how good it is, and not understand that their money will be locked up for a period of time and a host of other issues.  To answer your next question, yes of course this can happen to someone with more money as well, but in the eyes of the law at that point there is a bit of caveat emptor.

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Guest valueInv

I am probably too small a fry for them to consider anyway.

 

Kind of funny that the government is trying to keep me from losing money by not letting me invest with this guy.  If they really wanted to help me they'd make a rule against me investing my money. :)

 

Seriously, I always thought that was a stupid rule.  Because you have a million dollars you must know something about investing?  They ought to give you a test.  Or , even more radically, stay out of it and let people make their own decisions.

 

Is he even accepting new investors?

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Guest deepValue

I am probably too small a fry for them to consider anyway.

 

Kind of funny that the government is trying to keep me from losing money by not letting me invest with this guy.  If they really wanted to help me they'd make a rule against me investing my money. :)

 

Seriously, I always thought that was a stupid rule.  Because you have a million dollars you must know something about investing?  They ought to give you a test.  Or , even more radically, stay out of it and let people make their own decisions.

 

Yea it's a bunch of bullshit. With this rule, the rich can get richer, while those of us who are not millionaires have less opportunity to become one. Similar to options trading rules.

 

Arlington had about $100mm AUM in November 2011. The minimum investment requirement is $1mm. The cost/hassle of administering small accounts is not worth the incremental increase in AUM. Even tiny hedge funds (say, $10mm AUM) looking to raise money do not want a bunch of $50k accounts to deal with. So basically they wouldn't want your account even if Big Brother wasn't trying to protect you from yourself.

 

I'm not sure what you're referring to as far as options trading. There is no account minimum mandated by the govt for options trading, though one may be imposed by your broker. Nothing a summer job can't fix though.

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I am probably too small a fry for them to consider anyway.

 

Kind of funny that the government is trying to keep me from losing money by not letting me invest with this guy.  If they really wanted to help me they'd make a rule against me investing my money. :)

 

Seriously, I always thought that was a stupid rule.  Because you have a million dollars you must know something about investing?  They ought to give you a test.  Or , even more radically, stay out of it and let people make their own decisions.

 

Yea it's a bunch of bullshit. With this rule, the rich can get richer, while those of us who are not millionaires have less opportunity to become one. Similar to options trading rules.

 

Arlington had about $100mm AUM in November 2011. The minimum investment requirement is $1mm. The cost/hassle of administering small accounts is not worth the incremental increase in AUM. Even tiny hedge funds (say, $10mm AUM) looking to raise money do not want a bunch of $50k accounts to deal with. So basically they wouldn't want your account even if Big Brother wasn't trying to protect you from yourself.

 

I'm not sure what you're referring to as far as options trading. There is no account minimum mandated by the govt for options trading, though one may be imposed by your broker. Nothing a summer job can't fix though.

 

deep, thanks for the information. I don't know a ton about the administration side of things, but what abut something like this. If they had someone who would stick, say $50,000 in it, ask no questions and be permanent capital (ie virtually no chance of taking money out for 10 years), wouldn't that make sense? I would think that having someone with the right mind set, who could become a big investor over time would be something desirable.

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Guest deepValue

I am probably too small a fry for them to consider anyway.

 

Kind of funny that the government is trying to keep me from losing money by not letting me invest with this guy.  If they really wanted to help me they'd make a rule against me investing my money. :)

 

Seriously, I always thought that was a stupid rule.  Because you have a million dollars you must know something about investing?  They ought to give you a test.  Or , even more radically, stay out of it and let people make their own decisions.

 

Yea it's a bunch of bullshit. With this rule, the rich can get richer, while those of us who are not millionaires have less opportunity to become one. Similar to options trading rules.

 

Arlington had about $100mm AUM in November 2011. The minimum investment requirement is $1mm. The cost/hassle of administering small accounts is not worth the incremental increase in AUM. Even tiny hedge funds (say, $10mm AUM) looking to raise money do not want a bunch of $50k accounts to deal with. So basically they wouldn't want your account even if Big Brother wasn't trying to protect you from yourself.

 

I'm not sure what you're referring to as far as options trading. There is no account minimum mandated by the govt for options trading, though one may be imposed by your broker. Nothing a summer job can't fix though.

 

deep, thanks for the information. I don't know a ton about the administration side of things, but what abut something like this. If they had someone who would stick, say $50,000 in it, ask no questions and be permanent capital (ie virtually no chance of taking money out for 10 years), wouldn't that make sense? I would think that having someone with the right mind set, who could become a big investor over time would be something desirable.

 

Get a bunch of your friends together, form a partnership capitalized with $1mm, and invest in Arlington if that's what you want to do. Arlington has two employees; they'd rather focus on investing than on figuring out who gets what for all of their accounts. Taking 20 $50k accounts and consolidating it into one account makes fund administration a lot simpler.

 

Many "value" hedge funds only accept like-minded investors that sign lock-up agreements, so the fact that you'd be willing to sign a 10-yr lockup for a $50k account doesn't really make you more valuable.

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Get a bunch of your friends together, form a partnership capitalized with $1mm, and invest in Arlington if that's what you want to do. Arlington has two employees; they'd rather focus on investing than on figuring out who gets what for all of their accounts. Taking 20 $50k accounts and consolidating it into one account makes fund administration a lot simpler.

 

Many "value" hedge funds only accept like-minded investors that sign lock-up agreements, so the fact that you'd be willing to sign a 10-yr lockup for a $50k account doesn't really make you more valuable.

 

I'm not a lawyer, but I do manage a fund, and I am fairly certain your suggestion is illegal.  If the partnership is formed by non-accredited investors with the sole purpose of investing in a hedge fund it is a violation.  Even if it passes that test, it could also be subject to a "look through" in terms of investor count.  Meaning if the partnership had ten people the fund would be using up ten slots.  Someone please correct me if I am wrong here.

 

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Get a bunch of your friends together, form a partnership capitalized with $1mm, and invest in Arlington if that's what you want to do. Arlington has two employees; they'd rather focus on investing than on figuring out who gets what for all of their accounts. Taking 20 $50k accounts and consolidating it into one account makes fund administration a lot simpler.

 

Many "value" hedge funds only accept like-minded investors that sign lock-up agreements, so the fact that you'd be willing to sign a 10-yr lockup for a $50k account doesn't really make you more valuable.

 

 

I'm not a lawyer, but I do manage a fund, and I am fairly certain your suggestion is illegal.  If the partnership is formed by non-accredited investors with the sole purpose of investing in a hedge fund it is a violation.  Even if it passes that test, it could also be subject to a "look through" in terms of investor count.  Meaning if the partnership had ten people the fund would be using up ten slots.  Someone please correct me if I am wrong here.

 

Tim is correct.  The partners within the partnership would have to be accredited themselves to invest in an accredited fund...regardless of how much capital they have in the partnership. 

 

That being said, there is no reason why a bunch of family members or friends could not start a partnership by pooling their resources, and then investing it themselves...if you are a decent investor, your group would beat the markets, reduce frictional costs, and no one would have to come up with huge sums of money to invest.  Your partnership could even invest in real estate and other opportunistic investments.  But you would not be able to invest in an accredited fund, hold yourself out as an exempt fund, or anything like that.  You would be just be invested in a closely held family and friends partnership.  Cheers!

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