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Investing Specialists

Vanguard Alludes to Absolute Return Fund in Managed Payout Fund Prospectus

Vanguard should launch its new Managed Payout Funds this month and, with them, a mystery.

A trio of funds of funds from Vanguard are designed to grow shareholders' capital while making regular monthly distributions. A revised prospectus was recently released, and it clarifies a number of issues. It gives the offerings formal names, sets their minimum investments and expense ratios, and further explains their strategies and risks. The most intriguing tidbit in the filing, however, is a reference to a fund that doesn't exist, which the new funds don't plan to invest in yet, but that Vanguard saw fit to mention in the document anyway.

A section devoted to "investments in a prospective absolute return fund" (a fund that tries to achieve positive returns no matter the market climate) piqued my interest because it read like Vanguard was contemplating launching a hedge fund for the managed payout funds to use. Granted, the filing goes out of its way to say the family has not decided to and may never create an absolute-return fund. Clearly, though, the firm wanted to ensure it had the flexibility to do so.

If It Walks Like a Hedge Fund ...
Whether or not the fund ever comes to fruition, its prospectus description has hedge fund written all over it. The offering would be "a private investment fund" that uses multiple strategies to seek capital appreciation with a low correlation to the stock market, according to the filing. It would seek out opportunities emanating from market structure, pricing, liquidity and volatility, and the relative value of various markets, according to the prospectus. It would have stocks, bonds, commodities, currencies, derivatives, short sales, leverage, and other asset classes and tactics in its tool kit and would not be organized as a mutual fund or "registered under any federal or state securities laws, including the Investment Company Act of 1940," the filing said.