The Potomac Funds of New York, which manages $1 billion in predominantly indexed, leveraged index and inverse indexed mutual funds, has adopted a new brand identity, Direxion Funds. The shop has also opened up a Boston sales, marketing and fund distribution office, hired a new chief executive officer and is ramping up its fund lineup as well as its fund wholesaler ranks.
"We decided to go with a new name that was forward thinking," said Daniel O'Neill, president and chief investment officer of the fund group. The Potomac Funds' name "wasn't a terribly great name," he admitted. Nor did it fit the fund group any longer, he said. "We didn't have the level of brand recognition before," O'Neill noted.
Still, The Potomac Funds claims it was the first to create an all-short positions mutual fund in December 1999 and a leveraged long 10-year bond fund in January 2005.
The Potomac Funds group was started in 1997 by a former employee of Rydex Investments. It originally established its beachhead in Alexandria, Va., near the shores of the Potomac River. But the fund advisor, Rafferty Asset Management, which has continued to manage the funds albeit under different leadership, later moved to an office headquartered in New York.
Rydex of Rockville, Md., and ProFunds of Bethesda, Md., are the firm's closest competitors in the leveraged index and inverse index funds space.
The new brand name was created with the help of Sametz Blackstone Associates of Boston, a strategic communications and consulting firm. The Direxion moniker was chosen, but purposefully spelled unconventionally, in order to promote the company's new direction and its focus on leveraged index funds.
The "X" signifies the amount of leverage some of the funds employ. For example, the Direxion Developed Markets Bull 2.0X Fund (formerly named the Potomac Developed Markets Plus Fund) seeks to produce a return equal to 200% of the return of the index the fund tracks, in this case the MSCI EAFE. Likewise, its bearish counterpart, the Direxion Developed Markets Bear 2.0X Fund (formerly the Potomac Developed Markets Short Fund) seeks to return 200% of the inverse performance of the MSCI EAFE.
In recognition of Boston being the "motherland" of the mutual fund business, the fund group has now established a new, second office in the Prudential Tower. While the New York office will continue to serve as the fund group's investment and trading activities hub, the new Boston executive office becomes home to all sales, marketing, distribution and administrative business for the Direxion Funds.
The expansion plans included the hiring this past January of Ron Fernandes as the firm's new chief executive officer, a position O'Neill had previously held. Fernandes, a Massachusetts native and 25-year financial services veteran, will oversee the sales, marketing and distribution efforts. Those efforts include significantly increasing the fund group's wholesaling force, both internally and externally.
Up until now, The Potomac Funds, which caters to the investment product needs of registered investment advisers who employ strategic asset allocation techniques in order to juice up returns and hedge against down markets, was lean and mean employing just two external wholesalers. But with the expansion, the company has taken on four additional external wholesalers and a team of 10 internal wholesalers. The sales desk will be split in two, with some of those internal wholesalers there to support multiple external salespeople, and some to proactively build relationships directly with advisers, O'Neill said.
Direxion Funds' growth plan includes enhancing the fund lineup, beyond rebranding each of its current funds. Funds generally fall into two camps: bull funds and bear funds, with a U.S. government money market fund tossed in. More than 30 funds have been newly registered, with some changing their names to better reflect their focus and others increasing the amount of leverage they can employ to as high as 250%.
In addition, 14 new specialty sector funds (seven bull funds and seven bear market funds) are in registration but haven't launched, as are two currency funds (one bullish, one bearish).
O'Neill noted that plans include a gradual rolling out of the new funds. Eight of the new funds debuted last week with others to follow. New offerings included the Latin America Bull 2X Fund, and the Japan Bull 2X Fund. "There's enormous interest in international now," O'Neill said.
Why the push to expand now?
"We felt we were at an inflection point," O'Neill said. "Ron felt the leveraged index fund space was underserved," he added. "We felt that unless we added substantially to our capacity, we'd be unable to seize the day."
As a whole, the Direxion Funds' executives are banking on the growth of "alternative" asset classes, which, they said, have been growing four times faster than traditional mutual funds. Moreover, the fund executives want to ride the wave as the leveraged index fund marketplace moves beyond its initial stages and goes more mainstream.
The firm hopes to have 50 funds by year-end 2006 and grow assets to as much as $4 billion within the next 18 to 24 months.
If the leveraged fund marketplace is growing, it isn't showing up in flows of assets from retail investors, said Andrew Clark, senior research analyst at Lipper of New York. "These will remain institutional vehicles," he predicted. "We're not seeing any strong retail flows into these products."
Direxion Funds is not the only fund shop changing names, if not brands. Eighteen of Rydex's leveraged index funds just underwent name changes to make their underlying investment strategies more apparent. Effective May 1, Rydex dropped the Latin and Greek monikers on funds, such as Mekros and Artkos, in favor of more conventional names that indicate the underlying benchmark, including the newly renamed Rydex Russell 2000 Advantage Fund and Rydex Inverse OTC Fund. Funds whose objective is to leverage movements in the index by two times will include the name "dynamic," while funds whose objective is to leverage their underlying index by less than two times will assume the "advantage" moniker. Thus, the Rydex Titan 500 Fund, which seeks to outdo the S&P 500 index by two times, will become the Rydex Dynamic S&P 500 Fund.
Kevin McGovern, vice president of business development at Rydex, said the new names will be less confusing to advisers and easier for them to explain to clients.
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