2012: Hedge funds go retail globally

Mon Dec 5, 2011

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Asset management dynamic is back in play as hedge funds try to navigate the retail minefield


By Niki Natarajan

As the global Occupy movement continues to make its mark on the capitalist world, hedge fund affluenza - an unsustainable addiction to economic growth - is set to become an epidemic in 2012. Leon Cooperman's UCITS debut can only signal one thing: the future of hedge fund asset raising lies increasingly in the noisy and over-crowded, fee-laden retail space.

In the funds of hedge funds world, New York-based Optima Fund Management, whose high-net-worth joint venture with Mellon has produced the Mellon Optima L/S Strategy Fund for the US registered investment fund market, is all set to pursue the retail investor in the European markets.

And like the now mass-marketed luxury jeweller Tiffany, one of the most exclusive FoHF brands looks ready to go retail too. The entrance of Blackstone Alternative Asset Management to the 1940 Act registered investment company market is further evidence that between RICS and UCITS this contagion is going global (see story, page 26).

As an in-depth look at the registered FoHF market shows, established hedge fund management companies such as Permal, Morgan Creek, BlackRock and Gottex are all preparing to unveil their new products next year. So why is this happening? And why now?

The first reason is that with the lacklustre performance in the hedge fund industry, performance fees are becoming as rare as a hen's tooth, thus the quest for assets - and the stable asset management fees - is taking hold in hedge funds now.

Second, much high-net-worth wealth has been wiped out, so personal money management is becoming more and more important. This is even resulting in some hedge funds entering the wealth-management space in a bid to become multi-dimensional asset managers, and of course pursue those lucrative fees.

The convergence in traditional and alternative investing is being assisted by the advent of the UCITS III wrapper in Europe and the RIC structure in the US. Once again, the asset management dynamic of manufacturing and distribution is back in play as hedge funds and funds of funds try to navigate the minefield that is retail distribution.

There are a number of ways to play this game. Permal is perfectly placed with its parent Legg Mason already a brand in the mutual fund world. Indeed, according to its N2 filings, it has registered two products, one with just Permal in the title and the other with also Legg Mason. Once these funds are up and running, it will be interesting to see how the underlying manager allocations differ - if at all, given they have the same adviser.

The other way to tackle the mutual fund hedge fund meld is to hire blue-chip FoHF sub-advisers, as Alternative Investment Strategies Group has done with its new ASGI Corbin Multi-Strategy Fund and ASGI Aurora Opportunities Fund. Should Aurora Investment Management really take to the retail world, it already has a foothold in Europe through its parent, Natixis.

Once again, investors will be faced with noise. Should they look for the best performers or buy the fund with the slickest marketing campaign? Interestingly in the UK, Standard Life, one of the largest retail players with billions in its Global Absolute Return Strategies fund, recently decided to shut its dedicated funds of hedge funds business, Aida Capital- perhaps signalling that the retail investor will be buying brands it knows over seemingly esoteric concepts that continue to gain bad press.

The real decision an investor has to make with hedge funds is whether or not they want the Real McCoy. And for what it's worth, replicators are not hedge funds. Frontier does, however, believe that a cocktail of hedge funds and replicators is a much more honest mix of exotic beta given the lower fees that it charges (see page 22).

It looks like brand marketing is heading to hedge funds in 2012. Let's just hope that cross-border messages do not get lost in translation and US managers heading to Europe do not make the mistake that one major US investment bank made in the 1990s when it brought its no-load mutual funds to the UK: investors had no idea what a mutual fund was and even less of a clue what 'no-load' meant.