Mutual fund companies are increasingly taking on the mindset of hedge funds, as they seek to offer clients access to alternative investments such as commodities or real estate and strategies like absolute return investing and combinations of going long on some stocks and selling others short.
"We're definitely seeing more mutual fund companies are getting into alternative investments," said Christopher Long, president of Palmer Square Capital Management in Leawood, Kan. "Because of a combination of market uncertainty due to the crisis in Europe and the U.S. fiscal cliff, those [investment] areas that have been historically hedge fund areas are now the ones that mutual funds are going after."
Between 2008 and the end of August 2012, more than 200 mutual funds were launched that invest in alternatives to stocks and bonds, according to data from Lipper.
The peak years were 2010 and 2011, when 50 and 64 new funds were created, respectively. This year is on pace to crack 50 new funds, too.
Assets under management in alternative investment funds have more than quadrupled to $94.4 billion at the end of August, compared to $23.3 billion at the end of 2008.
Many different types of funds are being launched with numerous approaches to the alternative investment model, including absolute return strategies, long/short strategies, inflation-beating strategies, commodities strategies, and hedging strategies that use derivatives to manage volatility.
A study released in September by consulting shop McKinsey & Company bears out the move into new types of assets.
Traditional asset managers are conscious of the growth potential for alternative investments and are gearing up to provide them to their clients, the study showed. But the managers also recognized that negotiating this turf may take some additional expertise they don't have in-house.
To that end, some mutual fund companies have been on a talent-buying spree. In September, Franklin Templeton bought a majority stake in K2 Associates, a hedge-fund-of-funds manager with $9.3 billion in assets under management.
Other asset management heavyweights such as Janus Capital Group, Gabelli Securities and AllianceBernstein have made new hires in their alternative strategies units.
In Gabelli's case, Joel Torrance, a 12-year veteran of fund-of-hedge-fund firm Global Asset Management, was hired to provide the "significant knowledge and experience in the hedge fund space [as] we enter a major growth phase in our alternatives business," said Managing Director Michael Gabelli at the time.
Gabelli Securities, a subsidiary of GAMCO Investments, controls almost $1 billion in assets under management.
The Hartford Mutual Funds have ridden a different horse into the alternative fund arena. Its long-time partnership with Wellington Management-a Boston-based asset manager with about $600 billion in assets, including about $40 billion of assets in alternative investments-has allowed the Radnor, Pa.-based mutual fund company an easy way to leverage into the alternative sector by creating funds off of Wellington's products, said Vern Meyer, the chief investment officer for The Hartford Mutual Funds.
"We can leverage our partnership with Wellington to offer our clients fund products that are less-correlated to stocks and bonds and [limit] downside risk," said Meyer. The Hartford Mutual Funds launched its first alternative fund in May 2010, the Hartford Global Real Assets Fund (HRLAX), which has accumulated $511.3 million in assets since the launch. The firm is readying another alternative fund, the Hartford Global Alpha Fund (HAPTX), and expects it to be launched later this year.
Getting the right people in place in the alternative investments sector is crucial, to reassure customers that the captains of their capital know how to sail, several fund managers said.
"Investors want to be comfortable with the level of experience you are bringing to the table," said Palmer Square's Long. "You have to illustrate that to clients-not just offer new managers who haven't done hedge fund strategies."
Palmer Square manages $600 million in assets, which includes the $170 million Palmer Square Absolute Return fund (PSQIX), which was launched in June.
Several fund managers agreed that such expertise can allow firms to stand apart from others in the increasingly crowded alternative space.
"Brand matters as well," said Daniel Kingsbury, president and CEO of Pioneer Investment Management USA Inc. "In this industry, with its multitude of choice and the increased role of institutional-type gatekeepers in every channel, your partners need to know what you stand for."
Pioneer, Kingsbury explained, has responded to the alternative investment trend over the past two years by building a line-up of flexible multi-sector funds, including a $405.4 million global allocation fund called Pioneer Multi-Asset Real Return Fund (PMARX) launched in May 2010; and a $60 million hedged credit open-end fund called Pioneer Absolute Return Credit Fund (RCRAX), started in April 2011.
"Many investors are focused on income as a long-term objective, so we also introduced two new products last year that we consider alternative income funds," explained Kingsbury. "One is a broadly diversified short-term income fund called Pioneer Multi-Asset Ultrashort Income Fund (MAFRX). The other is a global income fund that invests in both equities and bonds, called Pioneer Multi-Asset Income Fund (PMAIX)."
Boston-based Pioneer Investment Management USA Inc. is the U.S. subsidiary of Pioneer Global Asset Management S.p.A., based in Milan, Italy. Pioneer Global held $196.3 billion in assets under management, including $62.8 billion in the U.S. subsidiary, as of the end of August.
Other mutual fund giants have also launched or are planning to launch alternative funds.
Principal Funds, the mutual fund arm of Principal Financial Group, has created a handful of alternative investment funds, for instance.