In a move that may indicate investment advisors are rethinking their footing within the registered hedge funds-of-funds marketplace, Aspen Strategic Alliances (ASA) of Atlanta, advisor to four hedge funds-of-funds that commenced operations less than one year ago, will pull the plug on the funds, liquidate assets and return investments to investors.
"We have decided not to continue in the public hedge fund marketplace and to focus our efforts in the private fund marketplace," said Ken Banwart, chairman and CEO of Aspen Strategic Alliances, which also manages private hedge funds. "It is not the environment that we perceived we were getting into," he said. "The public fund marketplace is not a good place for smaller companies, and with 11 employees, we are definitely small."
According to Banwart, part of the problem was the Blue Sky fees that state regulators charge public hedge funds. They are exorbitant and can be problematic unless an investment advisor has significant assets or deep pockets, he said. Private hedge fund managers don't have to deal with those fees.
The four funds, each under the ASA funds banner name, were initially registered in July 2003 but first commenced operation eight months later in March 2004. Each fund invests in a variety of private hedge funds that employ different investment strategies. The four funds that will be liquidated between the end of February and April 30 are: the ASA Debt Arbitrage Fund, the ASA Hedge Equity Fund, the ASA Managed Futures Fund and the ASA Market Neutral Fund. As of July 31, 2004 the four funds had a collective $16 million of assets under management.
Although the plan is to liquidate assets, ASA would be willing to sell the investment advisor and the four registered hedge funds to an interested buyer, Banwart said. With all of the funds already SEC registered, voluminous compliance manuals created, valuable strategic relationships in place and one SEC audit already under their belt, the funds do have a value, he added. "We would entertain someone acquiring these funds or the management company."
According to Banwart, he has already been to the bargaining table with two interested advisors, one a huge company with a bigger infrastructure and one a smaller company. Neither is currently active in the public hedge fund domain, Banwart said. In the end, both recognized the highly restrictive regulatory environment and chose not to acquire the funds, he added.
The truth is that if a private hedge fund manager hasn't already jumped into the SEC-registered marketplace with their own product, chances are they won't be doing so by acquiring registered hedge funds, according to Todd Draney, managing director and co-founder of Marriott Affiliated Capital Partners of Alpine, Utah. Marriott is the advisor to the Ensign Fund, a 13-month-old private hedge fund with $12.5 million in assets.
Draney believes that eventually, the "retailization" of the hedge fund industry will occur and will likely be driven by a big player such as Charles Schwab, which could put a hedge fund product in every portfolio. "The hedge fund business is such a cash cow," he said. But right now, the push to offer registered hedge funds to a broad demographic just isn't successful yet. "I think we'll see some having success, but it's a long ways out yet," he said.
Last year, Schwab announced it would offer access to a variety of registered hedge funds to the registered investment advisors Schwab services under its institutional division. That platform, known as the Schwab Alternative Investment Source, now offers 14 funds from eight investment managers. The registered hedge funds from ASA had been a part of that platform offering. Schwab's goal is to add another 15 registered hedge funds to the platform this year, said Schwab spokeswoman Lindsay Tiles.
There is a lot of money out there now, and many private hedge fund managers are more interested in focusing on the trend toward more institutional investors, such as foundations, endowments and Taft-Hartley plans, that are allocating money to hedge funds, said George Lucaci, managing director of Channel Capital Group in New York, which runs the Web site hedgefund.net. Moreover, some hedge fund managers have ignored the public marketplace because it would require them to invest in the necessary infrastructure to service a myriad of smaller investors instead of a handful of large investors, he said. "To many, [the public hedge fund market] is a distraction, and they don't really need it," Lucaci said.
Although hedge fund managers with assets that are slow to build can easily find a costly infrastructure has gotten ahead of assets, investors and financial advisers alike have a steep learning curve when it comes to understanding how hedge fund strategies work, said Gary Shugrue president and chief investment officer of Ascendant Capital Partners in Berwyn, Pa. And it's something many investment firms have overlooked, he added.
In addition, there has been a lot of misinformation about hedge funds swirling about, he said. "I think more and more are getting comfortable with some of the strategies, but not all," he said. Shugrue believes that certain strategies, such as convertible arbitrage strategies, are more difficult for investors to fundamentally grasp. And arbitrage strategy managers have been under increasing pressure to take on more leverage.
Within its group of five registered hedge funds-of-funds, Ascendant Capital recently shelved one of its funds and will focus exclusively on the four others, which invest under a long/short strategy that most investors seem to more easily embrace, Shugrue noted.