Thursday, June 25, 2009

Mutual funds that invest in hedge funds

Hedge funds are trying to get some retail capital. Achieving that via a mutual fund is one approach.

From the NY Post:

After making billions off the backs of rich people, a growing number of hedge funds are betting they can strike gold by morphing into mutual funds and targeting the middle class.
Well it's not like the mutual fund industry has been doing charity work. Billions have been made in fees by mutual fund managers of some absolute dogs. Long only funds that charge 1% - 1.75% fees for "stock selection" have gotten rich on the backs of the middle class.

In 08 an average hedge fund lost about 22%, while equity mutual funds got hit with a loss that's about double that. And there were some real winners in the mutual fund space, like the Winslow Green Growth which is down 62% or the Legg Mason Opportunity, down 66%. Many would rather take their chances with a diversified portfolio of hedge funds.
"If you're a half decent hedge fund, it shouldn't be that difficult for you to become a top-quartile mutual fund," said one hedge exec.
With that in mind, even in this regulatory environment, firms are trying to launch mutual funds that invest in a pool of hedge funds. Here is a press release from Van Eck:
Van Eck Launches Multi-Manager Alternatives Mutual Fund; Designed for Retail Investors Seeking Exposure to Hedge-Style Investment Strategies

... launch of its new Van Eck Multi-Manager Alternatives Fund (ticker: VMAAX), an open-end mutual fund designed to give investors exposure to a variety of investment strategies, including absolute return strategies. This launch was a natural fit for Van Eck, as the firm has been managing a similar strategy for over six years as an investment option for variable life and variable annuity insurance contracts
So this option to allocate to hedge funds already exists for investment choices in various insurance products.

From Reuters:

AQR Capital Management LLC, among the world's largest hedge fund managers, will introduce another hedge fund-style mutual fund next month, as it expands its reach beyond the biggest investors.
AQR has actually already launched a hedge fund mutual fund called AQR Diversified Arbitrage Fund (ADAIX). Here is a description from the prospectus:

AQR Diversified Arbitrage Fund (Absolute Return Fund)
The Fund invests in a diversified portfolio of arbitrage and alternative investment strategies employed by hedge funds and proprietary trading desks of investment banks, including merger arbitrage, convertible arbitrage, and other kinds of arbitrage or alternative investment strategies described more fully below. The Sub-Adviser tactically allocates the Fund’s assets across alternative investment strategies with desirable anticipated returns based on market conditions.
The Fund will also engage extensively in short sales of securities.
Finally a mutual fund that can short (without necessarily being a bear fund.) However, this one isn't exactly for the "middle class":

And they hit you with some nice fees that are on top of what the portfolio hedge funds charge. But that's the price you pay for getting the liquidity of a mutual fund while investing in what effectively is a hedge fund of funds.

The performance is shown below - a nice steady climb typical of a hedge fund of funds (until there is a systemic problem like in 08). This is likely to track something like the Credit Suisse Tremont index (with some lag due to higher fees).

But given how limited the choices are in the traditional mutual fund space (even though there are thousands of funds), this type of product will be welcomed (hopefully with some lower minimum investment requirements).

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