Hedge funds & mutual funds: “resistance” and “turf wars” or just eloping in Vegas

Retail Investing 26 May 2009

The “Resistance”

Hedge funds may have been beaten into submission by the combination of market and regulatory events, but hedge fund strategies live on.  Morningstar’s Ben Alpert recently shone a spotlight on the tenacity of the alternative investment industry by referring to it as the “resistance” (to the traditional investing empire, one assumes).

Wrote Alpert:

“It’s true that the pace of new fund launches in the first quarter of 2009 was roughly half that of the past five years, causing a decline in the number of funds for the first time in memory…But even during the market’s darkest days of late 2008 and early 2009, new hedge funds were opening.  A search of Morningstar’s hedge fund database recently revealed nearly 100 inceptions in the fourth quarter of 2008 and 75.”

He goes on to describe several new mutual funds that use hedge fund strategies.

“The noted liquidity and leverage restrictions prevent many alternative strategies from being offered to nonqualified investors in mutual fund form. But there are a significant and growing number of alternative style mutual funds working within these limits.”

If hedge funds constitute the “resistance”, then mutual funds that use hedge funds strategies can be considered none other than turncoats.

A War on Two Fronts

Hedge funds would be well advised to take a cue from the US military – which prides itself on being able to fight a war on two fronts simultaneously.  The FT writes in an article titled “Big banks moving in on hedge fund turf” that investment banks are also trying to exploit the weaknesses of hedge funds by providing hedge fund strategies to a broader audience.

“The woes of hedge funds may be an opportunity for investment banks, which are starting to provide products designed to meet the demand for the uncorrelated absolute returns hedge funds purported to offer.”

Of course, investment bank prop desks virtually invented the hedge fund industry as we know it today.  But according to the FT, their renewed interest in alternative beta “index” funds signifies the dawn of an era of more aggressive marketing to a broader audience.

A “Turf War”

Reuters’ Herbert Lash uses a more urban analogy of a “turf war” between hedge funds and mutual funds.  Writes Lash:

“Mauled by the carnage on Wall Street, mutual funds are copying hedge fund strategies in an effort to regain some of the shine they have lost this decade…”

He points to several of the new alternative beta ETFs (GS, IndexIQ etc.) as evidence of this hedge fund / mutual fund turf wars.


Reporting from a hedge fund gathering earlier this month in Las Vegas, Reuters’ Joseph Giannone wrote that both sides – hedge funds and mutual funds – might put aside their quarrels and basically just elope…

“Hedge fund and traditional money management firms hard hit by last year’s market meltdown are poised for a surge of mergers and acquisitions to bolster depleted assets and widen sources of revenue.”

Questions remain, of course, regarding the longevity of these snap unions contemplated in Las Vegas.  I mean, come on…Axl Rose, Richard Gere, Brittany Spears, Frank Sinatra, Mia Farrow…

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