Mutual fund and alternative investment advisors alike have been racing to attract wealthy clients with a rash of new hedge funds over the past year.
Since the beginning of 2001, nearly two dozen investment advisors, including some high-profile players, have registered alternative investment products, most of them hedge funds.
New products include hedge funds of funds, funds that invest in private and illiquid securities, and funds that utilize sophisticated strategies such as long/short, market neutral or arbitrage. In fact, advisors have been so eager to tap into this market that they have even been offering products with lower than usual investment minimums, to secure even a small slice of the alternative investments pie.
"The mutual fund industry has recognized that this is an asset class that is here to stay, and offers higher management and incentive fees," said Bruce Lipnick, president of Asset Alliance Corp. of New York, an alternative investment company.
Within the mutual fund world, new product innovators include AXA Investment Managers; Montgomery Asset Management; OppenheimerFunds, through its subsidiary Undiscovered Managers; and Putnam Investments, in a joint venture with Thomas H. Lee Partners.
But non-mutual fund managers with long track records of managing alternative investments for institutional investors and wealthy clients, have also been increasing their hedge fund product arrays. For fund companies hoping to get into the potentially lucrative hedge fund marketplace, these experienced managers will indeed prove stiff competition.
Just last month, two veteran alternative investment managers registered hedge funds and more advisors are rumored to be ready to enter the market.
Aetos Alternatives Management, a new advisory company founded this past January, and a subsidiary of Aetos Capital, LLC of New York, registered its first four hedge funds of funds. These include the Aetos Distressed Investment Strategies Fund, Aetos Long/Short Strategies Fund, Aetos Market Neutral Strategies Fund and the Aetos Multi-Strategy Arbitrage Fund. Aetos currently manages $240 million in alternative investment assets. Its two primary executives have histories managing alternative investment assets for large university endowments.
Similarly, on March 29, Torrey Associates of New York registered its own trio of hedge funds of funds: the Torrey International Strategy Partners Fund, the Torrey Multi-Strategy Partners Fund and the Torrey U.S. Strategy Partners Fund. Torrey currently manages $400 million for wealthy clients and institutions and is the advisor to Torrey Funds Management, a hedge fund complex of seven domestic and nine offshore hedge funds.
Besides the potential to tap into the wealthy market, another draw of the hedge fund market is the allure of more malleable investment products that don't move in tandem with either the stock or bond market, and offer the potential for higher returns and, therefore, greater profits.
Beating the Market
Poor market conditions over the past two years is another reason for the increased interest in alternative investments, said Bill Santos, chief marketing officer for Montgomery Asset Management of San Francisco. Montgomery is set to launch the Montgomery Partners Absolute Return Fund under its newly created alternative-investment division, Montgomery Partners, and has other alternative investment products in development.
Hedge funds have consistently beaten the stock market over the past two years, Santos noted. That track record, combined with the realization that world markets have become highly correlated and move in lockstep, has prompted fund advisors to look to other investment options, Santos said.
In addition, hedge fund target customers are investors with between $1 million and $5 million of net worth, which accounts for about 92% of the high-net-worth population, Santos said. "In the retail marketplace, everybody is coveting the $1 million to $5 million client," he added.
Tapping the institutional marketplace for alternative investments is a secondary market advisors are exploring. Montgomery's marketing, sales and distribution efforts, for example, will initially focus on wealthy individuals, with plans to later target institutional investors, such as endowments and foundations, Santos said.
Aetos, as well, will predominantly target such institutional investors as corporations, pension plans, endowments and even insurance companies, said Anne Casscells, managing director and CIO. She was previously the managing director and CIO of Stanford University's endowment.