Forward Launches Hedge Fund in Sheep’s Clothing

By: FinAlternatives
Published: January 12, 2007

Most mutual fund/hedge fund hybrids have taken the form of “1X0/X0” strategies with a net market exposure remaining at 100%.  But here’s an example of a mutual fund that is pursuing an all-out hedge fund strategy.

According to FinAlternatives, San Francisco-based Forward Management is launching a mutual fund with a long/short credit mandate (by unhappy coincidence, that’s the strategy last week’s Deutsche Bank survey said was going to shrink by 7% in 2007).

Investors Love Performance Fees

Okay.  Maybe “love” is too strong a word.  But after all the bemoaning of hedge fund fees by the media, Forward firmly believes clients actually don’t mind paying performance fees.  According to Forward’s President Alan Reid, performance fees are okay with retail investors as long as they don’t have to deal with those pesky K-1s:

The marketplace has really come to us and said, what we’d really like to see is more access to alternatives, Reid says. ‘We don’t mind paying performance fees, but we hate [Schedule] K-1s.'”

It’s All About Alpha

Distributors, often accused by manufacturers of “not getting it (alpha)”, seem to really know what they want.  According to Forward, they want alpha:

“‘This is a difficult environment for investors,’ (Reid) says. ‘People are digging hard for double digit returns.’ He adds, ‘our clients—top registered investment advisors and wealth managers—asked us for help. They need something that won’t take up the entire bond portfolio, but at least offers some alpha.'”

No.  It’s All About Transparency.

Picking up where FinAlternatives left off, this Reuters piece points out that Lipper tracks only 82 long/short mutual funds (out of 7862 – that’s a little over 1% of the total).  Another player, London’s ThomasLlyod, in the hybrid game echoes Forward when they say the market actually wants hedge funds – just with more transparency:

“‘A lot of people like the idea of hedge funds but they can’t get comfortable with the lack of transparency,’ said Charles White, chief investment strategist at ThomasLloyd.”

No, Wait.  It’s All About Beta?

But despite the (warranted, we believe) optimism coming from 1X0/X0 suppliers, there are still indications that when markets are up it’s still all about beta for most mutual fund investors.  Says Reuters:

“..the new funds have not yet become runaway hits, partly because their returns have been relatively modest. In 2006, the average long/short equity fund returned 10.2 percent, far less than large-cap value funds, for example, which rose nearly 18 percent, Lipper data show.

“‘In a year where the stock market did well, anything that involves a lot of shorting, as these funds do, is not going to look so good,’ Morningstar’s (Analyst Russ) Kinnel said.”

Read Full FinAlternatives Article (free registration required)
Read Forward’s Press Release
Read Reuters Article

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