Mutual fund allocations to hedge fund strategies look to be on the increase, as managed accounts open up a way for mutuals to tap non-correlated returns with the required levels of transparency and liquidity. For their part, hedge funds will do their best to attract this stable investment in a still-fluctuating market.
With capital raising still a challenge, prime brokers say that the whispered dialogue between hedge fund managers and mutual funds is growing more audible. For its part, the hedge fund industry will look to mutual funds, which allocate to hedge funds to act as their sub-advisors, as a stabilising force in an alternatives industry nervous about
unpredictable capital streams.
Stuart Feldman, senior vice president of Jefferies & Co’s capital introductions group, has seen, over the past year, many of his smaller hedge fund clients engaged in a dialogue with alternative strategy mutual funds, who farm out capital to managed account structures.
“Emerging managers in this capital-raising environment have had to evaluate non-traditional channels, which
includes alternative strategy mutual funds, as well as separately managed accounts,” he says. “The terms from these types of institutions can vary as to custody, transparency and fee structure. Our capital introductions group is in touch with these types of investors and will introduce managers on the Jefferies platform when appropriate.”
In the last month alone, HFMWeek has reported that two prominent mutual funds are looking for more hedge fund strategies to act as sub-advisors to their offerings. Van Eck Global, the New York-based asset manager, is looking to invest in long/short equity, options volatility and merger arbitrage strategies for its Multi-Manager Alternatives Fund, motivated by the uncorrelated returns delivered by this type of offering.
Scott Scaffran, an analyst at Van Eck Global, says that its Multi-Manager Alternatives Fund, which debuted last June, is upping its investments in hedge fund strategies on the premise that they provide liquidity and transparency.
“The hedge fund universe is becoming more competitive every year,” he says. “Our product can help emerging managers gain assets so that larger investors can begin to invest. We capitalise on a managers’ desire to grow, by investing in a flat fee through managed accounts which offer transparency and liquidity.” The fund, which is also sub-advised by mutual funds and ETFs as well as hedge funds, deploys approximately 10% of its $21m in assets.
Additionally, Ascentia Capital Partners, the Nevada-based registered investment advisor, is searching for a long/short advisor for its Alternative Strategies Mutual Fund following its recent allocation to California-based Armored Wolf’s global macro real asset strategy. It is seeking a US long/short equity strategy, as it looks to outsource the management of an existing in-house product.
Steven McCarty, managing director at Ascentia, says its mutual fund strategy is beefing up hedge fund allocations in anticipation of a stock market drop.
“The alternative strategies are a good way to invest in an interest rate-rising environment, and if rates rise, bond principal is at risk,” he says. “We think Armored Wolf is a terrific strategy in a marketplace that will ultimately experience rising interest rates.” Typically, the fund will invest $3m-5m to one manager in each strategy.
For Armored Wolf, the Ascentia allocation is not the only recent success. It has also been named a sub-advisor for Eaton Vance Management’s Eaton Vance Commodity Strategy Fund, which has exposure to commodities-related investments backed by long and short positions in fixed-income securities.
Butch Andreini, director at Armored Wolf, says that, since the fund's launch in 2009, it has always looked to pursue various investments and regards the interest of mutual funds as a way of guaranteeing stability.
“It’s a great business diversifier and something we can do with relative ease given the institutional infrastructure put in place to run our flagship product,” he said. “The real money initiatives create a revenue stream that is uncorrelated to the hedge fund business and this is clearly a positive development for the industry, which has seen how the unpredictable nature of hedge fund fees can put pressure on, destabilise and, in some cases, close a business.”
With managers of both mutual and alternative stripes keen to iron out the instability and unpredictability of fund management, the hedge fund industry is poised to see more capital from mutual funds, particularly from those which employ hedge funds as sub-advisors.
From HFMWEEK published on 09/06/2010
