Fund name: Tilson Focus (no symbol)

Objective: A non-diversified domestic equity fund which can hold both long and short positions, and places a substantial fraction of its portfolio in derivatives.

Adviser: T2 Partners Management, Ltd.  T2 manages about $110 million for high-net-worth individuals through a variety of offshore and hedge funds.

Manager: Whitney Tilson and Glenn Tongue.  Mr. Tilson is a certified celebrity in the world of money managers.  He is portrayed as “a young curmudgeon” whose official biography notes that he manages a long list of investment vehicles, wrote for The Motley Fool and TheStreet.com, teaches financial analysis, co-founded the non-profit Initiative for a Competitive Inner City and an investment fund targeting inner-city and minority-owned businesses, was “a founding member” of Teach for America and the recipient – with High Distinction – of an MBA from Harvard, his undergrad alma mater.  Mr. Tongue had a distinguished career at UBS and Donaldson, Lufkin, Jenrette before joining T2.

Opening date: March 16, 2005.

Minimum investment: $2500 for both regular and tax-sheltered accounts; that minimum drops to $1000 for investors willing to establish an automatic investment plan.

Expense ratio: 2.40% after an expense waiver; 6.67% without the waiver.  In addition, the fund has a performance-based fee structure under which the investment advisory fee – the managers’ cut – can vary from 1.05 to 1.95%, based on its performance relative to the Wilshire 5000.

Comments: If you can imagine “Ariel Focus with Attitude,” you’ve got a pretty good snapshot of Tilson Focus.  Both funds are run by very bright citizens of Graham and Doddsville.  As a result, both sets of managers talk about the same values: investing in companies and not just stocks, looking for good management and economic moats, buying dollars for fifty cents, and holding on until the rest of us realize that we want those stocks and bid up the prices.

At that point, some serious differences emerge.  It appears that T2 seeks to mimic, so far as a mutual fund practically can, one of their hedge funds.  An interview in ’05 refers to T2’s “incredible record,” articles in ’04 note that his Tilson Growth Fund, LP returned 65% over 5 years while the S&P500 had returned zero and that he beat the S&P in 2003’s strong up market and (by 3:1) in 2004’s mixed one. In “the shadowy world of hedge funds,” that might be about as complete as public disclosure is going to get.  Since his hedge fund reportedly doesn’t rely on abstruse strategies for its success, Mr. Tilson believes that he will be able to emulate its success in a mutual fund portfolio.  In particular he has committed to matching the “long” positions in the mutual fund to long positions in his other partnerships.  Over its very short life, the fund has consistently outpaced both the S&P500 and its Morningstar peer group.

So what differences flow from the experience of running a hedge fun?

1.     The mutual fund may be a lot more concentrated than normal “focus” funds – the manager allows that he might hold as few as 12 names. 

2.     The mutual fund has the mandate to short stocks and will use options to manage volatility.  His 4/30/05 portfolio lists call options on ten stocks.  In nine instances, the fund also owns stock in the company.  In three cases, the value of the call options was substantially greater than the value of the stock position.

3.     The fees will be higher – the expense ratio, after waivers, is 2.40%.  In part that’s because the fund is tiny (under $10 million), but the advisory fee can run as high as 1.95%.

4.     There’s a hefty redemption fee – 2.00% for shares held less than 12 months.  His first shareholder lettter (6/27/05) asks investors “to behave as if your capital were locked up for an extended period, rather than like typical mutual fund investors . . .”

5.     He’d prefer that you not look too frequently at fund performance.

6.     He’d prefer that you not bother him – don’t write, don’t call, and “don’t send an e-mail berating us or demanding an explanation” for “problem stocks” in the portfolio.

Bottom line: Mr. Tilson seems to have a strong track record and a good head.  He’s trying to align his interests with yours by investing heavily in the fund and setting pretty high standards for his incentive fee.  If you’re willing to risk considerable volatility and pay substantially above-average fees, this offers an intriguing option for aggressive value investors.

Company website: http://www.tilsonmutualfunds.com/index.html