Former Hedge Fund Investors Look to Long-Short

Investors pushed out of hedge funds by the new accreditation rules will likely flock to long/short funds that mimic the high-stakes hedge fund tactics, according to HedgeWorld. And fund companies are getting ready with new products.

Those new rules, which require hedge fund investors to have at least $2.5 million to invest—not counting real estate or other tangible assets—exclude more than 90% of Americans from participating, compared to the old rule, which required only $1 million or $250,000 in annual salary, and allowed approximately 30% of the population to partake.

“The change of the definition of accredited investor will probably have an impact for people no longer eligible to invest in hedge funds, prompting them to look elsewhere for products that have the attributes of alternative investments,” said John Brunjes, an attorney at Newark, N.J.-based  McCarter & English.

And that provides a new opportunity for hedge-like mutual funds, especially so-called 130/30 funds.  Typically, 130/30 funds borrow $30 for every $100 invested to buy stock managers then short. The manager then takes the gains, plus the initial $100 investment, and purchases $130 of stock to hold long-term.

The result is a portfolio with $130 invested long and $30 short, and because managers employ short selling to leverage the long-only portfolios, they please both mutual fund mavens and hedge fund refugees, according to Andrew Alford, a senior portfolio manager and researcher at Goldman Sachs Asset Management.

Others see the 130/30 funds as a type of hedge-fund-lite. 

“The 130/30 funds are close to the hedge funds from the standpoint that they are engaged in short-selling and leverage, but it doesn’t take maximum advantage of short-selling or leverage,” said Kurt Borgwardt, manager of the Kansas City, Mo.-based American Century Long/Short fund. “It’s a way for institutions to put a toe in the water,” he said.

Although they are a relatively new fund class, several companies have developed 130/30 offerings.

Goldman Sachs launched two funds last October, while ING and Barclays Global Investors each have versions of their own.

American Century is now considering opening a retail version of the 130/30 fund it offers institutional investors.

Even traditional hedge fund managers are looking to capitalize on the 130/30 trend. D.E. Shaw Investment Management in August expanded its institutional alpha-adding lineup, some of which are 130/30 funds based on equity benchmarks. HedgeWorld quoted an unnamed source at D.E. Shaw that suggested bond-based 130/30 products may also be in the works. “It may take a long time because everybody sticks to equity at this point. But it will happen," the source said.