Infovest21 Special Research Reports

Looking at April 2012 as a snapshot in time, we saw a number of new alternative mutual fund products (also known as liquid hedge fund, 40 Act hedge funds and hedged mutual funds) come to market reflecting the fast paced growth occurring in that sector.

For example:

• Wilmington Trust launched a new mutual fund, Wilmington Rock Maple Alternatives Fund, which provided exposure to multiple managers and multiple strategies. Rock Maple Securities provides manager selection and due diligence, portfolio construction and risk management services.

• New York-based RiverPark Advisors introduced the RiverPark Long/Short Opportunity Fund, a new open-end mutual fund, that is available through Charles Schwab, Fidelity and Pershing. It is a conversion of an existing hedge fund launched by RiverPark in October 2009.

• Aristotle Capital Management, LLC announced the introduction of the Aristotle/Saul Opportunity Fund, its first open-ended mutual fund. At its core, the fund strives to be a global unconstrained strategy. It employs an actively managed “go-anywhere” strategy with a fundamental, bottom-up approach to security selection. It focuses on high quality, structurally good businesses with sustainable competitive advantages that are believed to be trading at significant discounts to Aristotle’s estimate of fair value.

• Hagin Investment Management launched its first mutual fund, the Hagin Keystone Market Neutral Mutual Fund, which is designed to deliver low volatility and low correlation to the market.

• The law firm Cole-Frieman Mallon & Hunt launched a joint venture shared trust with Gemini Fund Services. In the Two Roads Shared Trust, Gemini acts as the administrator, accountant, and transfer agent and provides other non legal services while Cole-Frieman provides legal services. The distributor is Northern Lights. The bundled services provide a low cost way for a hedge fund manager to launch a mutual fund as barriers to entry are reduced.1

Financial crisis provides impetus for growth

Currently, alternative mutual funds at $122 billion represent only about 0.9% of the $13.5 billion in total mutual fund assets.

Significant growth occurred in the aftermath of the financial crisis in 2007 and 2008.

In August 2007, when the Bear Stearns hedge funds collapsed, non volatile strategies became volatile. “Strategies that were viewed as absolute return and consistent, proved not to be. Investors started to question allocations to hedge funds. Investors started to rethink their allocations to hedge funds. The sacred bond between manager and investor had been broken.”2

 From that point, on, [some investors] were burned by [some] hedge funds’ performance and bad behavior such as gating, restricting investor access to capital etc. This started a shift away from hedge funds.3

This environment accelerated in 2008. 130/30 products were an attempt by long-only firms to satisfy demand for hedge funds. It served as an entry point to have discussions with clients about alternatives and about shorting. The problem was that few strategies satisfied that demand. The products didn’t mirror what was happening in hedge funds. 4

 Since 2008, the “year of the gate” in the hedge fund world, a growing number of hedge fund investors have come to appreciate liquid alternatives as a viable “alternative to alternatives.”5

People who ran asset management firms realized an opportunity existed to offer alternatives to a broader audience (i.e. those who were not accredited and did not qualify to use hedge funds). The 40 Act funds could offer return enhancement, risk mitigation, non correlation to traditional investments and transparency.  It solved some problems by providing better liquidity, federal oversight, a more aligned fee structure, simplified tax reporting i.e. using 1099s instead of K-1s, and lower minimums. It was a friendlier way to invest.

It became a scramble to find and launch alternative mutual funds.7 Institutional banking firms and mutual fund organizations started to use alternative mutual funds as a way to differentiate themselves from their peers.

In this special research report, Infovest21 interviewed about 20 wealth fund managers, registered investment advisors, management consultants, mutual fund executives, hedge fund and mutual fund managers, fund of funds and 40 Act fund of funds managers as well as attorneys.

The report examines the demand for 40 Act hedge funds/funds of funds that exists for each of the major user groups. The supply side is also analyzed e.g. the various products and approaches available. The motivations for hedge fund/fund of funds managers to start 40 Act funds is discussed as well as the hurdles that stand in their way. Hedged mutual funds are compared with hedge funds and Ucits. The report concludes with an outlook for alternative hedge funds/ funds of funds going forward.

 Excerpt from Special Research Report – Liquid Mutual Funds: Trends, Challenges, Opportunities and Outlook….40 pages. $500