Alternatives juggernaut Blackstone joined the likes of other fellow private investment firms The Carlyle Group and Kohlberg Kravis Roberts (KKR) last month as the asset management practice continues its revolutionary switch in business focus out of institutional coffers and into the retail investment space.
Blackstone Alternative Asset Management (BAAM), the New York-based investment and advisory firm's hedge fund solutions business, noted July 16 that the Blackstone Alternative Multi-Manager Fund (BXMMX), a registered open-end mutual fund, serves as an attempt to satisfy current and potential customers.
"We achieved our status as premier hedge funds solutions provider by preserving capital in the midst of volatile markets and by developing innovative solutions to meet our investors' needs," J. Tomilson Hill, vice chairman of Blackstone and CEO of BAAM, explained. "We are delighted to enter this market and to offer a daily liquid product that provides portfolio diversification through alternative strategies that are designed to be uncorrelated with those of traditional asset classes."
While Blackstone was unwilling to discuss the new fund, previously announced details highlight that it will utilize prior relationships with a number of current hedge fund managers in its circle.
The multi-strategy fund's portfolio construction, according to BAAM Head of Portfolio Management Stephen Sullens, came to fruition when it decided to leverage its custom solutions approach already made available to its institutional investors.
"We are confident that we have identified hedge fund strategies and manager skill sets that translate well into a multi-manager solution in a 1940 Act framework," Sullens said.
Asset managers are committed to the alternatives bandwagon, according to a Cerulli Associates July 2013 report highlighting that liquid '40-Act mutual fund formats are becoming commonplace for both private investment managers and traditional style-box asset firms.
Figures from Cerulli's Alternative Products and Strategies 2013: Identifying Enduring Opportunities in Complex Markets report shows that 33% of managers surveyed said they have brought on sub-advisors to assist with the additional workload. The remaining subset indicates 72% chose to build their alternatives business internally with existing portfolio managers, 31% noted that they acquired a portfolio management team to help, and 19% explained that they ventured out in the marketplace to acquire specialty alternatives shops.
With Blackstone utilizing a sub-advisory platform, Carlyle elected for a different route earlier in the year when it lowered its requirements that would allow people to invest as little as $50,000 in its buyout funds. High-net-worth and small institutions money manager Central Park Group (CPG) will serve as an investment advisor and deal directly with new signees for the CPG Carlyle Private Equity Fund.
The Carlyle Group's co-CEO and co-founder David Rubenstein said previously that expanding to new individual and eager high-net-worth investors has become the new normal.
"While fundraising from individuals or institutional investors is still not a walk in the park, we are clearly seeing demand increase especially from individual investors," Rubenstein noted in a May 9 First Quarter 2013 Results Conference Call.
Underfunding from its traditional base of capital, the institutional investor and U.S. pension space, has been dwindling, according to Rubenstein.
"[U.S. pension fund money is] still a large source of money," Rubenstein said. "[This will persist] probably for the next five years or so, so I don't see anybody being bigger than U.S. public pension funds as a source of capital for firms like ours. But it is declining."
Right now, defined benefit plans are roughly 28% of the more than $176 billion in assets under management maintained through Carlyle's 114 funds and 76 fund-of-funds options, Rubenstein noted.
But, recent Investment Company Institute data explained the defined contribution plans held about $5.1 trillion at the close of 2012. Employer-sponsored 401(k) plans make up the largest share of the retirement pie at 80%.
While still unchartered waters for many private investment firms, Rubenstein predicts a change in 401(k) mutual fund lineups that help to guide individual plans and employer plans that were worth about $4.2 trillion in 2012.
"I do think that non-accredited investors will ultimately be able to invest in private equity through 401(k)s and other things," Rubenstein explained. "That's not quite there yet, but I do think there's some impetus to that and that will provide additional capital for people like us down the road."
Similarly, first indications of new KKR mutual funds sprang up in a separate July 18, 2012, Securities and Exchange Commission filing. Both the KKR Alternative High Yield Fund (KHYZX) and the KKR Alternative Corporate Opportunity Fund (XKCMX) were introduced at that time. However, on Aug. 1, the firm said that its first closed-end fund, the KKR Income Opportunities Fund, raised up to $352 million in its first public offering.
"Increasingly, individual investors are seeking exposure to strategies to diversify beyond traditional long only equity and bond funds," said George Roberts, co-founder and co-CEO of KKR, in a statement.
However, Michele Giuditta, associate director at Cerulli, said it will be interesting to see what firms like KKR, Blackstone and Carlyle can do because they "haven't really built a track record in those products yet." Because of this, Cerulli explained that increased competition will soon be commonplace in this small subset of the mutual fund space, which garnered a 2.2% slice of total mutual funds at the end of 2012.
"I think increased competition should ultimately help as these high profile experienced alternative managers develop new products," Giuditta explained. In terms of investor knowledge, Main Street's individuals are a far cry from what Wall Street has been accustomed to over the years. The Financial Industry Regulatory Authority (FINRA) warned investors of these inherent dangers through a June Investor alert.
Gerri Walsh, FINRA's senior vice president for investor education, disclosed that the regulator is keeping an eye on the industry as it evolves.
"One of the things we always tell investors is, you can control your cost you can't control your return," she said.
"You do see investors chasing yields, and so there is demand for products that offer higher returns," Walsh added. "So the message we want to make sure retail investors understand is that with higher return typically comes higher risk and often comes higher cost," she stated.
Attempts to gain comment from Carlyle and KKR were unsuccessful.