The new look for hedge funds this summer: mutual funds

Retail Investing 06 May 2009

Despite the aversion retail investors have recently had to hedge funds, the hedgification of traditional investments is apparently continuing in some quarters of the money management business.

Back in March, Chip Roame, the founder and CEO of Tiburon Strategic Advisors told the online newsletter Advisor Perspectives that:

“Absolute returns and more broadly non-correlated assets are likely to be a growing part of the investing market. Consumers will seek out advisors and institutions that offer non-correlated assets. These strategies will come back and grow within the 40-Act universe and among traditional hedge fund product structures. Investors have paid such a dear price in the current market, and they want to believe that some smart guy can figure out how to properly diversify and reduce risks.”

One group of possible “smart guys” at UK manager Gartmore has just announced its entry into the retail hedge fund market.  Gartmore’s Phil Wagstaff recently told Reuters that:

“The hedge fund world and the UK retail world will collide – we see this as a core area for us going forward and we see this as a growth area for the industry…”

Wagstaff goes on to say that “genuine” hedge funds with little to no market beta will remain in demand by retail investors seeking true diversification.  (Notably, the firm plans to actually hire several senior staff to handle new business like this one after laying off several dozen last year).

The interest among traditional managers in buying or launching hedge funds is spreading faster than the swine flu.  Aberdeen Asset Management is shopping for beaten-down funds of funds.  It’s chief executive told Reuters this week that:

“We like the fund of hedge funds area and that’s become more and more attractive over the past six months as valuations have collapsed in that sector as the assets under management have fallen dramatically…”


It will come as no surprise that the counter-trend – the traditionalization of hedge funds – also continues unabated.  As the Wall Street Journal reported last month, hedge fund stalwart Permal launched its first mutual fund under the banner of “Tactical Allocation”.

According to the firm’s marketing literature, the fund can short up to 40% of NAV and is long in equities, fixed income and cash.  But according to the April 16 manager commentary, there were no short positions in the fund (other than short positions that might have been contained in the paltry 4.9% allocation to actual hedge funds).

Of course, the mutual funds launched by hedge fund companies needn’t be predominantly long-only.  You may remember hedge fund AQR’s January entree into the mutual fund business with the AQR Diversified Arbitrage Fund.  According to data from Morningstar, the fund has all the juice of a typical hedge fund offering including short-selling and leverage:

Critics of the hedge fund industry have always derided the “hedge fund model” (fees, less regulation, secrecy, yada yada yada).  But the popularity of hedge fund strategies in a Ucits or mutual fund structure is living proof that the fundamental shift to alpha-centric investing continues.

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  1. John R. Crittenden
    June 18, 2009 at 12:02 pm

    This is a steady migratio away from the strict style box process that institutional investors and retail firms have been pushing for the past 20 years. During the 20 year bull market from 1980 to 2000, they actually fooled themselves into thinking it was that easy. 5 years ago they abhorred a flexible investment mandate and demanded a rigid sixe and style. This “new” retail product mentality won’t work. Alpha is all about exploiting inefficencies in a certain market or markets. Homogenized alpha is contradictory.

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