As the hedge fund industry struggles to attract growth – more hedge funds are entering the mutual-fund business. Hedge Funds Entering Mutual Fund Like Business – JOBS Act That Alloves HF Advertising May Drive Some Trend MF Issuance
The struggling hedge fund industry has hit upon a brilliant growth strategy: If you sell more products that more people can invest in, you will likely attract assets.
More hedge funds announcing they’re entering the mutual-fund business. While this may smack of desperation from an industry that has, largely, suffered from poor performance and ignominious outflows, the reasons aren’t all craven: The asset-management industry is changing rapidly. There’s more demand for alternative investments – McKinsey & Co. predicts U.S. allocation to alternatives will increase to 28% of total portfolio assets by the end of 2013—but there’s also more aversion to the lockup periods that prevent investors from withdrawing their money. Also, the largest investors in these alternative funds are those quaint pension plans that few Americans are offered these days. As those plans shrink, there’s more demand for more widely available alternative strategies, like long/short, distressed debt and merger arbitrage.
Even noted private-equity firm KKR (ticker: KKR), which manages $62 billion, just last week registered with the Securities and Exchange Commission to launch two hedge-fund-like mutual funds, the KKR Alternative High Yield mutual fund, and the closed-end KKR Alternative Corporate Opportunity fund, which will target “special situations,” such as distressed debt in Europe and Asia.
AQR Capital Management President Cliff Asness
AQR Capital Management, which has had a leg in the mutual-fund world since 2009, launched four additions earlier this month— U.S. Defensive Equity (AUEIX), International Defensive Equity (ANDIX), Emerging Defensive Equity (AZEIX), and Risk-Balanced Commodities Strategy (ARCIX). All are no-load and sold only through advisors that the firm relies on to explain its strategies. AQR manages $55 billion in assets, including $7.1 billion in its 16 mutual funds.
Newer entrants may be making a more calculated move to create a silver lining amid all the additional regulation they’re constantly complaining about. Under Dodd-Frank, any fund firm with more than $150 million in assets must now register with the SEC. While many of the most reputable, larger funds had already done so—”We registered on day one, it’s a good housekeeping seal,” says AQR co-founder and principal David Kabiller—smaller firms opted for, and enjoyed, less regulatory oversight.
But while larger firms have the scale and expertise to support a new line of business, smaller funds that hop on this trend are more likely doing so in an effort to stem or reverse outflows. They’ll quickly learn that launching a mutual fund requires more than just registering with the SEC. Leaving aside the cultural differences of managing money for the masses, there are a slew of compliance and distribution issues to tangle with.
Larger firms have sought to diversify their offerings for years, and, as a result, have built up the infrastructure—compliance and administrative personnel, for instance, along with good relationships with registered investment advisors—needed to enter the much more highly regulated mutual-fund world. These obstacles may be insurmountable for one-fund shops.
The much-heralded JOBS Act, which will allow hedge funds to advertise, may also drive a trend toward more mutual-fund issuance. “They can advertise, but not everyone can invest in them,” says Nadia Papagiannis, director of alternative-fund research for Morningstar. “So why not launch a vehicle that everyone can invest in?”
Hedge Funds Entering Mutual Fund Like Business
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