Mellon: Retail investors showing “a lot of interest” in what institutions are doing with hedge funds

Hedge Fund Copycats Catch Mutual Fund Buyers as Returns Dwindle

By: Danielle Kost & David Clarke, Bloomberg News
Published: February 26, 2007

There is a common belief in the asset management community that retail investors are “return chasers” compared to institutions.  In other words, it’s generally tough to convince a retail investor that a loser fund is actually a great investment because of its diversification properties.  The unfortunate headline to this story makes this point crystal clear.

But there are encouraging signs that individual investors are beginning to think more holistically about their portfolios.  This article is another in a string of recent articles about “hedged mutual funds”.  Although the headline suggests investors should indeed chase hedge fund returns, asset growth in this sector seems to suggest that some investors are willing to hang in during sub-S&P 500 years in order to benefit from hedge funds’ lack of market correlation (or negative correlation) during down markets.

In other words, individual investors are following a trail that has been blazed by institutions over the past several years.  Bloomberg quotes Jon Baum, Vice Chairman of Distribution for Mellon as saying, “There’s been a lot of interest among individual investors about what institutions are doing.”

According to the article, these individual investors have expressed this interest with investments in various long/short mutual funds.  Bloomberg reports on four in particular:

  • UBS US Equity Alpha Fund: $150 million raised since September 26, 2006
  • Blackrock Absolute Alpha Fund: $200 million raised since opening “two years ago”
  • Mellon Global Alpha Fund: $237 million raised “since it was started in May”
  • JPMorgan Multi-Cap Market Neutral Fund: $2.1 billion raised “since 2004”

As we’ve argued before, what starts in the institutional market eventually trickles down to the retail segment in some form – regardless of how strongly some pundits feel about the lack of sophistication of advisers and individual investors.

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