Fox Run Management, LLC (“FRM” or the “Investment Adviser”) is a Delaware limited liability company
organized in 1997. FRM manages the investments of Fox Run Alpha Fund, LP (the “Alpha Fund”), a hedge
fund which is under common control with it, as well as the investments in a segregated portfolio for
another private fund (the “Private Fund”). This segregated portfolio is managed pursuant to a subadvisory
relationship with the primary adviser for the Private Fund which is not affiliated or under common control
with FRM. Although the segregated portfolio of the Private Fund has other portfolios managed by third party
unaffiliated subadvisors, FRM manages only the assets in the designated segregated portfolio of the Private
Fund. FRM does not manage, or have access to, any information, concerning other portfolio assets of the
Private Fund.
Peter Klein, FRM’s Managing Member, Chief Executive Officer, Chief Compliance Officer and sole equity
owner, is also the Managing Member and sole equity owner of Fox Run GP Services, LLC, the “General
Partner” of the Alpha Fund.
FRM has been the investment adviser for the Alpha Fund since the Alpha Fund’s inception in 1997. The
Alpha Fund is a quantitative hedge fund engaging in various algorithmic trading strategies, some of which
are referred to as Statistical Arbitrage. The designated segregated portfolio of the Private Fund is managed
on a
pari passu basis with that of the Alpha Fund.
As noted above, FRM manages a designated segregated portfolio of the Private Fund. This is done on a
pari passu basis with that of the Alpha Fund.
FRM has managed the designated segregated portfolio of the Private Fund since June 2011 as a direct
adviser for the Private Fund. However, beginning in January 2016, FRM’s relationship with the Private
Fund was restructured as a subadvisory arrangement whereby a newly-organized primary adviser (the
“Primary Adviser”) to the Private Fund (through its discretionary authority over the Private Fund),
appointed FRM to serve as a subadvisor for the Private Fund. Other than the modification of the
relationship between FRM and the Private Fund (i.e., direct adviser/client to subadvisor/client) FRM’s
management of the assets of the Private Fund is unchanged. However, as part of the restructuring of the
Private Fund’s investment management as well as the restructuring of the investment management of the
other segregated portfolios of the investment fund to which the Private Fund is one series, (the
“Investment Fund”), the Private Fund’s affiliate organized a new private investment fund (the “New
Fund”) managed by the Private Fund’s Primary Adviser in which portfolio managers (including their
affiliates) of segregated portfolios of the Investment Fund may invest as passive non-controlling equity
members. The New Fund’s investments include, among other things, interests in the Private Fund and the
other segregated portfolios of the Investment Fund. Peter Klein, the controlling principal of both FRM and
the General Partner of the Alpha Fund, has invested in the New Fund and is therefore now also a passive,
non-controlling equity owner of the New Fund and an indirect non-controlling equity owner of the Private
Fund. Peter Klein’s investment in the New Fund is, however, of a de minimis nature, constituting
approximately 1% of the New Fund’s aggregate membership interests.
Accordingly, Mr. Klein now has an additional financial incentive with regard to the performance of the
Private Fund since, in addition to his subadvisory relationship, he is a de minimis owner of an entity (the
New Fund) which itself invests in the Private Fund.
FRM places trades on behalf of both the Alpha Fund and the segregated portfolio of the Private Fund in a
single omnibus account and then allocates the resulting trades, both long and short on a
pari passu basis
between the Alpha Fund and the segregated portfolio of the Private Fund. Since the accounts of the Alpha
Fund and the segregated portfolio of the Private Fund are separate proceeds from the sale of securities
as well as dividends or distributions paid by issuers would flow through to the respective accounts
based on their respective holdings. Deductions of any commissions, fees, interest and other expenses paid
to the broker-dealers executing such orders as well as the fees of the prime broker serving as custodian of
the omnibus account, are made separately from each client account following allocations from the
omnibus account and are based upon charges separately negotiated and agreed to by the prime broker
and each of the Alpha Fund and the Private Fund.
The Alpha Fund, the segregated portfolio of the Private Fund and any other clients whose accounts may be
managed by FRM in the future are hereinafter sometimes referred to collectively as the “clients.” The
strategies employed in managing both fund accounts typically try to profit from either mean reverting
features of stock prices or momentum-like properties of stock prices. For instance, individual stock returns
tend to revert to the mean or average in the short-term, so that a few days of strong relative performance is
often followed by days of relative weakness. Also, stocks that have recently experienced positively-
revised earning expectations tend to continue to receive positive revisions; this is often reflected in
continued relative outperformance. The trading strategies employed by FRM for its clients attempt to take
advantage of these and other relatively short-term anomalies. The Investment Adviser has broad
discretion to vary and redesign the strategies being used for trading at any time based upon the
Investment Adviser’s view as to which strategies have the greatest potential to generate favorable
returns. Investments made through the various investment strategies may include common and preferred
stocks, options, convertible debt, closed-end funds, warrants, bonds and other financial instruments if the
Investment Adviser believes such investments would be advantageous. FRM also uses leverage (margin) and
short selling techniques.
Since inception, Peter Klein has been the sole principal of FRM. He and his management team direct the
investments made for clients.
FRM does not participate in wrap fee programs.
FRM invests all assets it manages on a fully-discretionary basis. As of December 31, 2019, FRM had
approximately $191,078,458 in regulatory assets under management.
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FRM derives compensation from its clients in the form of a management fee, payable in advance based upon
the value of the account as of the close of the prior period. Currently, the fee equals 1.5% of the value of
the account per year, or 0.375% quarterly. Based upon the arrangement made with each client,
this fee may be deducted from the client’s account or may be invoiced and paid directly to FRM by the
client.
In addition to the asset-based management fee, FRM or the General Partner receives a fee based upon the
performance of the client’s account. Such fees are described in Item 6
Performance-Based Fees and Side-
By-Side Management below.
Fees may be subject to negotiation with each client.
In addition to the management fee, private fund clients may be charged reasonable travel, legal,
accounting, audit and tax return preparation fees and expenses relating to its operations, as well as the
costs associated with investigating potential investments or ways to maximize return on existing
investments. All custodial fees, interest on borrowed funds, transfer taxes, brokerage commissions,
finder’s fees, and fees and expenses for consulting, research and statistical services (including but not
limited to technology, software and data feeds), are also paid in varying degrees by clients. The actual
charges allocated to clients may differ based on negotiated fee structures and their relative percentages of
total assets under management. Clearing charges, liquidity charges and charges for data-feeds, that drive
the models that are used for trading are usually the largest portion of these charges.
In the event of the termination of the investment management agreement or subadvisory agreement that
the Investment Adviser has entered into with a client as of any day other than the end of a calendar
quarter or other billing period, a pro-rated portion of the management fee which was paid in advance for
that calendar quarter or other billing period will be refunded by the Investment Adviser.
Other than as described above, neither the Adviser nor any of its supervised persons receives any
compensation from the sale of securities or other investment products.
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As noted above, FRM receives fees based on performance of client’s accounts. In addition, although FRM
does not itself receive any fee based on performance from the Alpha Fund, the General Partner of the Alpha
Fund, Fox Run GP Services, LLC, which is an affiliate of FRM, receives a performance-based incentive
allocation equal to 20% of the Alpha Fund’s profits in any year. However, since the incentive allocation paid
by the Alpha Fund to the General Partner, and the incentive fee paid to FRM, are both paid on what is
commonly called a “high water mark” basis, no performance-based compensation is paid on any profits until
the profits generated exceed any prior losses incurred by the client.
If, in the future, the Investment Adviser manages any other accounts, it is anticipated that the fees
applicable to such accounts would be structured in substantially the same manner, although the specific
percentages of either the management fee or the annual incentive fee may be separately negotiated with
each client.
The receipt of this performance-based compensation by the Investment Adviser and its affiliate may
create an incentive for FRM to recommend investments that carry a higher degree of risk to its clients.
In addition, the General Partner has the right to reallocate any portion of its incentive allocation to a
limited partner in the Alpha Fund. Any such reallocation would be substantially the same as a reduction or
discount in the incentive allocation charged to that limited partner.
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FRM currently only provides investment advice to two private funds, namely the Alpha Fund and the
segregated portfolio of the Private Fund, both of which are hedge funds.
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FRM uses extensive quantitative and statistical research to design, test and implement a variety of
computer driven investment strategies. The Investment Adviser attempts to select strategies designed to
deliver consistent returns in different market environments with little or no correlation with the
performance of the stock market as a whole. Use of these strategies, like any investment, involves the risk of
loss that investors must be prepared to bear. Specifically, the fact that a particular strategy has been
profitable in the past does not guarantee that it will continue to be profitable in the future, or that it will
not result in losses, and many once profitable strategies go through extended unprofitable periods. FRM
devotes much effort to managing the relative weights of active strategies in an attempt to enhance
profitability and control risk.
FRM attempts to design strategies with a view to mitigating the risks associated with owning individual
securities, and to limiting exposures to particular sectors or industry groups as well as exposure to the broad
market. Furthermore, the various strategies typically have balanced dollar and volatility exposures on the
long and the short side, as well as similar long and short dollar amounts invested in specific sectors. In
addition, the Investment Adviser seeks to trade securities that have a high degree of liquidity. As is always
the case with short sales, there is a theoretically unlimited potential for loss since there is no limit on how
high the shorted security could rise in price. The Investment Adviser attempts to mitigate this risk through
diversification.
The Investment Adviser also uses leverage in its investment strategies, sometimes significantly. The use of
borrowed funds in this manner can amplify losses as well as gains.
The Investment Adviser also attempts to mitigate risks associated with general risk factors besides market
risk, e.g., size and momentum. These exposures are managed when necessary by making appropriate
adjustments in the particular investment strategies being employed at the time.
There is no guarantee that any of these risk mitigation techniques will work in the future.
The investment strategies FRM uses are researched and designed primarily through back-testing and
simulations. This is a process that involves the application of a strategy against actual historical market
data to see how it would have performed if it had been used during various periods and under various
market conditions. While this method of testing a particular strategy can be helpful in determining how the
strategy may operate in the future, no amount of back-testing can assure success. The securities markets
are always changing, so a strategy that would have been profitable in the past under the specific market
conditions that then existed may not operate in the same way or be profitable under current or future
market conditions. Transaction costs can also negatively affect the profitability of a trading strategy.
FRM carefully analyzes these costs in the research and implementation process.
Additional risks may arise through programming or operational errors. Actual results are carefully
compared to simulated results in an attempt to quickly discover such errors.
The strategies recommended by the Investment Adviser involve frequent trading, high turnover and short
holding periods. While this can be helpful in controlling risk, there are drawbacks to that approach as well.
Transaction costs from frequent trading can significantly limit profits. Therefore, the successful use of
these strategies will depend partially on the Investment Adviser’s ability to negotiate low execution and
clearing costs with the broker-dealer used to execute transactions, and there is no guarantee that the
Investment Adviser will always be successful in keeping these costs low. Another consequence of high
turnover is a short holding period. As a result, there is no expectation that a client will be able to get long-
term capital gains treatment for any profits, and all profits will be taxed at higher ordinary income rates. In
these, as with any other tax-matters, investors should consult with their tax advisers.
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In this Section of this Brochure, we would disclose any material legal or disciplinary matters that would have
a bearing on a prospective client’s evaluation of our business or the integrity of our management. Neither
FRM nor any of its associated persons has been the subject of any material disciplinary events.
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The Adviser is not registered, and does not have an application pending to register, as a broker-dealer or
registered representative of a broker-dealer. Currently, no employees of the Adviser are registered
representatives of a broker-dealer.
Neither the Adviser nor any of its management persons are registered, or have an application pending to
register, as a futures commission merchant, commodity pool operator, commodity trading advisor, or an
associated person of the foregoing entities.
As noted earlier in Item 4 –
Advisory Business, the General Partner of the Alpha Fund is affiliated with FRM
since Peter Klein is the sole principal of each company. Peter Klein is also majority limited partner of the
Alpha Fund. Additionally, FRM is a small limited partner of the Alpha Fund owning less than a 1% interest in
the Alpha Fund.
Additionally, as previously noted in Item 4 –
Advisory Business, Mr. Klein, the sole principal of FRM, is also
an investor in the New Fund which, in turn, has invested in the Private Fund. Mr. Klein may therefore also
derive economic benefits from the Private Fund’s investments through his equity interest in the New
Fund. However, Mr. Klein’s interest in the New Fund is of a minority, non-controlling nature constituting
approximately one (1%) percent of the New Fund’s membership interests. Moreover, Mr. Klein is a passive
investor and does not control or otherwise direct the nature or size of investments made by the New
Fund.
FRM does not recommend or select other investment advisers for its Clients.
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and Personal Trading FRM has adopted a Code of Ethics which sets forth the standards of conduct expected of its associated
persons, and which addresses the conflicts that can arise from personal trading by them. The Code of
Ethics requires our associated persons to notify the Investment Adviser of the existence of any securities
accounts in which they or members of their households have an interest. The Code of Ethics also requires
periodic reporting by such persons through duplicate copies of account statements, so that the
Investment Adviser can monitor such persons' trading to prevent any violations of the Code of Ethics or
other conflicts of interest which could result from employee trading. A copy of our Code of Ethics will be
provided to clients or prospective clients upon request.
FRM's associated persons are not prohibited from buying, selling or holding securities that have been
bought or sold for a client's account, except that to the extent associated persons wish to invest in initial
public offerings or limited offerings, prior approval of such transactions is required. However, the Code of
Ethics requires such persons to conduct their personal securities transactions in a manner that does not
interfere with transactions for any client or take unfair advantage of their relationship with such client's
account. Due to the nature of the Investment Adviser’s trading strategies, however, which consist of very
short term trading of relatively small amounts of highly liquid securities, with orders placed almost
instantaneously after the generation of a trading signal, it is unlikely that any trading by an associated
person could interfere with or "front-run" client transactions in a material way. In addition, because of the
relatively small size of FRM’s trades in such highly liquid securities, it is unlikely that FRM’s trading could
have any meaningful market impact. As a result, it would be unlikely that any person could profit in a
material way, by front-running or trading ahead of trades made by FRM on behalf of its clients.
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FRM executes a substantial amount of recommended trades through J.P. Morgan Clearing Corp. (“J.P.
Morgan”), its Prime Broker, which is also the custodian of both the Alpha Fund’s and the segregated
portfolio of the Private Fund’s assets. The Investment Adviser selected J.P. Morgan based on a range of
criteria, the most important being cost, quality of service and creditworthiness. FRM periodically
reevaluates the commissions it pays to J.P. Morgan to ensure that its charges are competitive.
FRM receives some benefits, from J.P. Morgan as part of the overall business relationship with J.P.
Morgan, including research and an execution platform. These benefits are not tied to a specific volume of
transactions. These benefits presently benefit all of FRM’s clients.
The Investment Adviser maintains relationships with other brokerage firms to get the benefit of so called
“algos”. These are broker-maintained algorithms that are designed to take advantage of technology to
work an order over a period time and provide superior execution relative to certain benchmarks (e.g.,
volume weighted average price, arrival price or closing price). FRM’s selection of which brokerage firms is
based on a careful evaluation of “algo” performance versus cost.
To the extent that FRM obtains research or other benefits as part of the overall business relationship, FRM
may be viewed as receiving a “soft dollar” benefit because it will not have to produce or pay for such
research itself. FRM, however, does not participate in any formal soft dollar arrangements, earn soft dollar
credits or pay specific additional brokerage commissions for research or other types of soft dollar benefits.
FRM may have an incentive to select a brokerage firm on the basis of benefits received rather than its clients’
interest in receiving the most favorable execution. FRM’s Code of Ethics requires it to act only in the best
interests of its clients, and FRM periodically reviews all brokerage arrangements to assure that its clients’
interests are being properly served.
Any benefits received by FRM benefit all clients to an equal extent so long as trades for all clients are made in
aggregated, or bunched, orders with shares allocated among client accounts equally on a pro-rated basis.
The costs of such arrangements are borne by all clients.
FRM does not require that clients use any specific brokerage firm to execute transactions. However, while
identical trades may be made for clients who direct their executions to their own brokers, such clients would
not necessarily pay or receive the same price as those whose trades are executed in a bunched order with
other clients, and they may not be able to take advantage of any commission discounts or lower execution
costs that may apply to the larger bunched order. Accordingly, the performance of such clients’ accounts
may suffer due to possibly less advantageous trade prices and costs.
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FRM’s Portfolio Manager, Trader, and Analysts review the portfolios of its clients on an ongoing daily basis. This
review includes reconciling the accounts of J.P. Morgan, the Prime Broker for both the Alpha Fund and the
segregated portfolio of the Private Fund, with trading blotters, as well as reviewing market sector and industry
exposures.
FRM’s independent accountant, Halpern & Associates LLC, provides the limited partners of the Alpha Fund with
monthly statements of the performance of the Alpha Fund, including account statements for their individual
interests therein. FRM also now utilizes the services of Halpern & Associates to perform necessary
AML/KYC OFAC checks for all new and current investors. A PCAOB registered accounting firm performs a year-
end audit of the Alpha Fund, and the audited financial statements are distributed annually to the limited
partners thereof.
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Neither FRM nor its affiliate, the Alpha Fund’s General Partner, presently have any arrangements with any
third-party solicitor to solicit potential investors for the Alpha Fund, or to solicit potential clients to open
other advisory accounts, although they may enter into such an agreement in the future. If they did enter
into such an agreement, the solicitor would receive a payment from FRM and/or the General Partner
equal to a portion of the fees received by them as a result of the referred investor's investment in the Alpha
Fund or in another advisory account, but no client or investor would pay any greater management fee as a
result of such arrangement.
Except as set forth with respect to certain benefits in Item 12
Brokerage Practices, FRM will not receive any
economic benefits from any a non-client for providing investment advisory services to the Advisor’s clients.
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The funds and securities owned by the Alpha Fund and the segregated portfolio of the Private Fund are held
by J.P. Morgan, the prime Broker of both the Alpha Fund’s and the segregated portfolio of the Private Fund.
J.P. Morgan provides FRM, the General Partner of the Alpha Fund, and the segregated portfolio of the
Private Fund, with monthly statements of account. It is likely that funds and securities of any additional clients
FRM may serve in the future would also be held by J.P. Morgan, which would send monthly account
statements to such clients as well. If FRM also sends statements or other reports to such clients, clients will
be advised to carefully review and compare its reports to those provided by the independent custodian of
their accounts.
While FRM does not maintain physical custody of client funds or securities (as described above), because
an affiliate of FRM serves as the General Partner of the Alpha Fund, pursuant to the SEC’s “Custody Rule,”
FRM is deemed to have custody of the Alpha Fund assets. The Alpha Fund is audited on an annual basis and
all Alpha Fund investors receive copies of its audited financial statements within 120 days of its fiscal year
end.
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Pursuant to the investment management agreements and subadvisory agreements between FRM and its
clients, FRM has full discretionary authority to manage the investments on behalf of its clients, and it
would expect to have similar authority with respect to all future clients. There are no limitations on the
discretionary authority granted by the clients.
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The Investment Adviser generally does not vote proxies relating to clients’ shares. The short-term nature
of the Investment Adviser’s trading strategies is such that it is inappropriate to do so, primarily because the
Alpha Fund and the segregated portfolio of the Private Fund have no long-term interest in any security
purchased, and their investments in any particular security would likely be liquidated prior to the
shareholder’s meeting for which the vote would have been cast. In the case of an exception to the
foregoing FRM’s policy is to vote solely in the best interest of the client. More detailed information is
available upon request.
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In this Item, certain investment advisers are required to provide clients with certain financial information or
disclosures about their financial condition which are reasonably likely to impair their ability to meet
contractual commitments to clients. The Investment Adviser has no such financial condition to disclose. The
Investment Adviser has not been the subject of a bankruptcy proceeding.
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