By Andrew Allentuck

(April 1) – For making astonishing returns in a very tough market, there are not many portfolios that can beat the Kugel Special Risk Pool’s one year return to Feb. 28, 2001 of 140.7%. A hedge fund managed in Liechtenstein, it invests in what manager Eugenio Ponzi describes as “special situations.”

“Our fund can go long in securities in any markets or take short positions,” he explains. Generally, we go into stocks that other funds have ignored or sometimes we will take an interest in a debt situation in which there have been performance or collection problems. We usually find that we can resolve those things.”

An experienced portfolio manager, Mr. Ponzi notes that his family name has an association that he always has to clarify. “There was another person with my name. He was associated with some bad practices many years ago. This is unfortunate. In fact, he was a distant relative. But this fund, which was set up by five families in New York, makes money by what you’d have to say are their traditional methods.”

“The Kugel Special Risk Fund uses techniques that other funds ignore,” Mr. Ponzi says. “Those include trading on calendar anomalies, such as the well-known January effect that often boosts the price of small cap value stocks in the first month of the year. We can also do trades on relations between stock prices and days of the week, the month, the party of the U.S. president and even outcomes of the American Superbowl,” he says.

For the January, 2001 Superbowl, for example, the fund bet on the market effects of a win by the National Football Conference’s Baltimore Ravens. “We went long on the market because the NFL market outcome theory, which has been right 80 times and wrong only 34, says that when the one of its members – who are now in the NFC – wins, the market goes up. The thing is that this year, the other team in the game, the New York Giants, was also an original NFL member. So we figured it as a sure thing. What we did, though, was skip the stock market on this one and just work with some friends of ours in Vegas. We laid down $5 million on exchange traded Spyders, exchange traded units that replicate the S&P 500 Composite. We bet that the market would go up within the week. It did, hitting a year to date high of 138, and we made $12 million on the position.”

In spite of the fund’s successes, investment experts are baffled that the portfolio is not more widely watched. “I think the problem on this fund, which has never lost money and often makes triple digit returns, has been access,” says Jack Thomas, an investment advisor based in the Bahamas. “The guys running the fund make great investments, but this is not what you would call an ethical fund. So if what the management does bothers you, forget about it.”

An example of what some investors find unappealing about the fund is a position the fund took in Consolidated Rendering and Packaging, a privately held sausage maker that operates in Brooklyn that is listed on the Bogota, Colombia bolsa with under its odd English acronym, CRAP.

“This was an old family firm that usually did a lot of contract work. But they had an image problem. Now some people have a problem with the management. And maybe even with how the firm handles collections. But what was in the bratwurst should have had nothing to do with that. Still, that was an issue and it was affecting the marketing of the stuff,” Mr. Ponzi says. “For us, this was a chance to go in with a modest investment – just $500,000, and move that meat by changing the labels. All legal, of course. We had a partner who knows the business. He shipped the product offshore, persuaded some wholesalers that this was a deal they should not refuse, and the company got back $15 million after just 60 days. That’s a 2,900% gain in two months. Now that’s business our investors understand.”

Similar trading techniques have been used by the fund to play political events, not always with expected outcomes “We use the indexes when we see a close election,” Mr. Ponzi says. “Democrats have been better for stocks than Republicans. Just look at the market under Clinton. So when we saw how close the Florida thing would be, we put some money on the Spyders. We figured that some of our friends would help out – send their family counselors and lawyers, for example. They sent in the best, but the other side took the election, as you know. On this position, we lost $15 million. As for the financial advisors who told us that this would work, I can only say that they probably won’t be giving much more advice.”

@page_break@Recently, the fund entered into a partnership with Tonga Hauling and Grain Ltd., a Shanghai-based based firm interlisted on Bangkok’s market with the unfortunate symbol THUG that migrated its capital from malt, which is used to handle, to machine guns. “Arms have gotten a bad name,” Mr. Ponzi says. “But look, in the U.S. Boeing makes defense systems and it’s a respected stock. So the investment really depends on who the customers are. And what I can say is that our investment of 8.5% of fund assets in the stock is very profitable. Our generic copies of Kalashnikovs are priced right for their markets and are a cash cow that provides a returns of 30% a month on our investment. If we have unsold product, our people just take the inventory to use in their own businesses. For us, this is a win-win investment.”

Montreal’s Mack Messer, an investment advisor with the firm of Messer, Au Fon, Intur & Associates, admits the fund is not for everyone. “Profits these fellas make. And personally, I got no problem with what you could call the fund’s style. But for most people, it’s a time thing. Some of these deals can take a year or two, sometimes ten to twenty, and maybe even life, if you know what I mean. But if you accept the risks, it can be interesting. You can start talking to the fund – that’s me – with $1 million. That’s cash.”

Manager Eugenio Ponzi, no relation
Sector: global equity
MER: 1% per week
Total assets: confidential
RRSP eligibility: definitely not
Vendor: Banque de Blanchissage, Liechtentein
Style: Special situations
Returns to 2/28/01:
1 year: 140.5%
2 year: -58.6%
3 year: 121.3%
5 year: 110.5%

Top ten holdings:

S&P Composite Spyders — 9.6%
Dow 30 Diamonds — 8.6%
Tonga Hauling & Grain Ltd., Bangkok — 8.5%
Notes, 1% per week, due next Monday — 8.3%
Balance of loans owing on $5 million loan, 10% weekly repayments — 6.2%
Consolidated Rendering, Bogota — 4.2%
Classic Liquors & Shipping (Macao) Ltd — 3.1%
Auto Repaint & Import Service, Moscow — 2.1%
Political contributions, annual, due April — 2.0%
Fool’s Hideaway & Travel, Paraguay — 1.0%